Daisy Rayner: Yusuf Cepnioglu – Direct rights of action against insurers are dealt a blow by the Court of Appeal

 

The Club has seen an increasing trend of domestic legislation allowing claimants to brinDaisy-Raynerg direct rights of action against insurers. Certain jurisdictions, such as most American States, have permitted such claims for a number of years, but more recently Spain and Turkey have enacted new maritime codes which allow direct rights of action against insurers.

This development poses a serious concern as it potentially entitles third party claimants to circumvent the choice of law and jurisdiction clauses within the Club’s Rules. Rule 1 Section 11A states that:

“All contracts of insurance afforded by the Association to its Members and these Rules and Regulations made hereunder shall be governed by and construed in accordance with English law.”

In addition, direct rights of action potentially circumvent the Club’s contractual defences, most notably our “pay to be paid rule”.

Factual background

In the recent case of Shipowners’ Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat Ve Ticaret AS, the Court of Appeal was faced with the question of whether the Club must defend such claims in a foreign jurisdiction (Turkey in this case) or whether the Club could rely upon the choice of law and jurisdiction provisions within its Rules and obtain an anti-suit injunction, an order issued by a court or arbitral tribunal that prevents an opposing party from commencing or continuing a proceeding in another jurisdiction, to prevent any action being prosecuted abroad.

The case arose following the grounding of the m/v Yusuf Cepnioglu on the Greek island of Mykonos in March 2014. The vessel was a total loss and cargo claims were initiated against both the Turkish charterers and the Club’s Turkish Members who owned the vessel.

The charterers commenced arbitration proceedings in London against our Members under the terms of the charterparty. As part of these proceedings, charterers sought an indemnity against liability to cargo interests, but were unable to obtain security from our Members.

Following this, in May 2014, charterers commenced proceedings against the Club in Turkey under Article 1478 of the Turkish Commercial Code, which states that:

“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 against the Club directly and sought to attach all premia due to the Club in the hands of brokers in Turkey, up to the value of US$ 13.5 million, as security for their substantive suit in Turkey. If successful, this would have resulted in our Turkish Members having overdue calls and ultimately the termination of cover once the notice of cancellation period expired. The attachment would also have captured broker’s commission.

The Club, with the assistance of Holman Fenwick Willan LLP, sought and successfully obtained on an ex-parte basis, where the opposing party isn’t present to put forward their case, an anti-suit injunction against charterers preventing them from pursuing their claims in Turkey. This decision was challenged by charterers, but in the first instance Mr Justice Teare held in favour of the Club and maintained the anti-suit injunction. The charterers then appealed this decision at the Court of Appeal.

Court of Appeal decision

The Court of Appeal judgment was split into two key questions, the first was to determine what rights Article 1478 gave charterers. In particular, did it allow the charterers to adopt our Members’ contractual rights against the Club, in which case the claim would be governed by English law and London arbitration?  If not, did the Article give the charterers an independent right of action governed by Turkish law?

The Court of Appeal was very clear in its finding that the claim by charterers was contractual in nature. There were a number of factors that pointed to the right being contractual, in particular:

1. The liability was due to an event occurring during the period of cover.

2. The claim was subject to the contractual limit in the Club rules.

3. The contract of insurance determined the perils insured against.

4. The claim must be brought within the period required by the Club’s cover.

Although not in evidence before the Court, it is conceivable that there are other defences within the Club Rules which point to the right being contractual.  For example, Rule 32 provides that liabilities are excluded if they are unrecoverable from re-insurers as a consequence of sanctions.

After the claim had been characterised as contractual, the second issue the Court of Appeal considered was whether an anti-suit injunction should be granted to restrain the charterers from continuing proceedings in Turkey. Anti-suit injunctions can be obtained in one of two ways:

1. If a party acts in breach of an exclusive jurisdiction clause an anti-suit will be granted unless there is no good reason for not doing so; or

2. Where the foreign proceedings are vexatious and oppressive.

When determining which route was appropriate, the Court of Appeal had to grapple with the two conflicting decisions. Ultimately, they concluded that the JAY BOLA case was to be preferred. This case provided that the insurer had a contractual right to have all disputes against him determined in accordance with the law and jurisdiction clause contained in the insurance contract. In addition, it concluded that equity requires that the choice of law and jurisdiction should be recognised. The Court of Appeal therefore concluded that the anti-suit injunction should be granted under the first route.

The charterers argued that this approach offended principles of comity by undermining the public policy of Turkey. However, the Court of Appeal disagreed with this argument stating that Article 1478 grants the victim the right to enforce the contract of insurance, not an independent right. The charterers applied for permission to appeal to the Supreme Court on this point, but the Court of Appeal rejected their application.

What does this mean for future direct right of action claims?

This decision provides welcome clarification for the P&I industry and demonstrates that the English Courts will support English law and jurisdiction clauses within contracts of insurance when insurers are faced with foreign direct claims.

However, it is worth bearing in mind that this decision is only relevant when the parallel proceedings are in non-EU jurisdictions. If the Club had tried to obtain a similar anti-suit injunction where the relevant foreign law had been that of another EU state, it would not have been possible following the decision of the European Court of Justice in Allianz SpA v West Tankers Inc (Front Comor), which made it clear that an English court would be bound by the rules of comity.

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