Web Alert: Rights of direct action against P&I clubs – The insurance contract takes priority

On 20 April 2016 the English Court of Appeal handed down its judgment in favour of the respondent P&I Club in The Yusuf Cepnioglu[1], maintaining an anti-suit injunction that had been granted at first instance.

Background facts
 
The Yusuf Cepnioglu grounded off the coast of Mykonos in March 2014, laden with 207 containers. She became a total loss. Cargo claims were notified to both the Turkish charterer and the Turkish owner. The charterer commenced arbitration proceedings against the owner in London, under the terms of the charterparty, but was unable to obtain security from the owner. The charterer therefore also commenced proceedings against the P&I club in Turkey, seeking security directly from the club for its claims.
 
The charterer essentially decided to take advantage of a direct action statute enacted in Turkey, which entitled it to seek an indemnity for its losses directly from the carrier’s liability/cargo insurer, in this case a P&I club. However, this Turkish statute infringes the long established ‘pay to be paid’ principle contained in all International Group (IG) P&I club rules, under which an insured will not receive payment from its insurers until it itself pays out on any claims against it (i.e. the principle of indemnity).
 
The P&I club in this case sought and obtained an anti-suit injunction from the English High Court, preventing the charterer from continuing with its proceedings in Turkey. The club contended that the Turkish proceedings were in breach of the English law and arbitration clause contained in the insurance contract between the club and the owner. The charterer appealed this decision to the Court of Appeal. 
 
Court of Appeal decision

The English Court of Appeal clarified that the first stage of the process was to determine whether the charterer’s right to bring a direct action against the club was fundamentally a contractual right (in which case it would be governed by English law/London arbitration) or an independent right of action (in which case it would be governed by Turkish law). This is the ‘characterisation’ test as confirmed in The PRESTIGE (No 2)3.
 
The Court of Appeal affirmed the High Court decision and held that the claim by the charterer here was essentially contractual in nature. Some of the factors that supported this decision were as follows:

• The loss was in respect of an insured peril;
• The claim was subject to the contractual limit contained in the club’s rules;
• The liability was due to an event occurring during the currency of the policy; and
• The claim was brought within the period required by the club’s contractual cover.

The second stage of the process was to consider whether an anti-suit injunction should be granted to prevent the charterer from continuing with the legal proceedings in Turkey. The Court of Appeal held that the club was entitled here to an anti-suit injunction. In doing so, the Court of Appeal had to consider two earlier, conflicting, decisions on the point – The Hari Bhum[2] and The Jay Bola[3]. 
 
The Hari Bhum suggested that an insurer could not obtain an anti-suit injunction against a third party claimant, because the claimant was not a party to the contract of insurance and, thus, was not bound by the arbitration clause. If correct, an anti-suit injunction could only be obtained if the foreign proceedings were vexatious and oppressive. On the other hand, The Jay Bola suggested that an insurer has a contractual right to have all disputes against it determined in accordance with the law and jurisdiction clause in the insurance contract.
 
The Court of Appeal held that the reasoning in The Jay Bola was to be preferred, on the basis that the claim here was characterised as contractual in nature and, therefore, the P&I club has a contractual right to contend that any claim brought against it pursuant to that contract be brought in (London) arbitration proceedings.
 
The charterer 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 of the Turkish Commercial Code grants the victim the right to enforce a contract of insurance, not an independent right. 
 
Conclusion
 
This is an important decision, which empowers insurers to restrain third parties located outside of the EU from litigating against them, through the use of anti-suit injunctions, where such litigation is inconsistent with the law and jurisdiction provisions contained within their insurance terms.
 
The position within the EU is not so straightforward, however, and on this subject the club refers to its earlier publication on the subject of anti-suit injunctions. 
 
This article intends to provide general guidance on the issues arising as a matter of English law. It is not intended to provide legal advice in relation to any specific query. The law is not static and if, in doubt, The Standard Club is always on hand to assist.
 
Members requiring further information on this topic should direct their enquiries to either their usual contact at the club, or to the authors of this article.
 

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[1] [2016] EWCA 386, Court of Appeal, 20 April 2016
[2] [2005] 1 All ER 715
[3] [1997] 2 Lloyds Rep 279 (CA)