Can an assignee of cargo claims under bills of lading be held liable to pay equitable compensation to the carrier if, in breach of an equitable obligation to arbitrate those claims, the assignee brings proceedings in respect of those claims in a foreign court against a party other than the carrier?
This issue has recently been considered by the English Court in two cases: the Frio Dolphin and the Prestige. The Court’s view is that, in principle, such damages are claimable.
Background
Where a contract provides for London arbitration and a party commences foreign court proceedings in breach of the arbitration clause, then the other party may seek an anti-suit injunction from the English Court where such an injunction is available or it may obtain damages in lieu of an injunction. Further or alternatively, it may seek damages for breach of the contractual obligation to arbitrate.
What is the position, however, if the party commencing foreign court proceedings is not a party to the contract, but is seeking to exercise certain rights under that contract?
Frio Dolphin
In Argos Pereira Espana SL & another -v- Athenian Marine Ltd (Frio Dolphin) [2021] 2 Lloyd’s Rep 387, an insurer was subrogated to the consignee’s claims under the bills of lading in respect of damage to a cargo of frozen fish. The bills of lading incorporated a London arbitration clause. The subrogated insurer brought claims in Spain against the vessel’s manager/charterer which were the same entity, mistakenly believing it to be the carrier. The manager/charterer’s jurisdictional challenge succeeded but the owner subsequently sought to claim the charterer’s irrecoverable costs in arbitration (on the basis of the transferred loss principle, owner and manager/charterer being closely related companies). The arbitrator found in the owner’s favour.
On appeal, the Court referred to two kinds of equitable obligations in such cases:
- Derived Rights Obligations (DROs), which arise when a party has a right derived under a contract, for example by way of assignment, subrogation or direct action statute. If it wishes to exercise this right, it can only do so in accordance with the forum clause set out in the contract from which its rights are derived. It is, therefore, bound by the forum clause, which is regarded as an equitable right equivalent to contract.
For example, in the Yusuf Cepnioglu [2016] 1 Lloyd’s Rep 641, charterers commenced direct action proceedings against owners’ P & I Club in Turkey following total loss of the vessel in question. Charterers sought an indemnity in respect of cargo claims brought against them under charterers’ bills of lading. The Court of Appeal held that the Turkish action was a breach of the insurance contract and that an anti-suit injunction restraining the Turkish proceedings was justified.
- Inconsistent Claim Obligations (ICOs), which are an equitable obligation on a foreign claimant not to seek to take the benefit of a contract without the burden of the exclusive forum clause in the contract, even in circumstances where the foreign defendant denies that it is a party to the contract on which it is being sued. Where available, an anti-suit injunction can in principle be granted to restrain such proceedings on the grounds that they are vexatious.
For example, in Qingdao Huiquan Shipping -v- SDHX [2019] 1 Lloyd’s Rep 520, a settlement agreement incorporating a London arbitration clause had been reached between shipowners and cargo receivers. Under the agreement, the receivers’ authorised agent, SDHX, was required to pay settlement sums to the owners. SDHX subsequently sought repayment of those sums in Chinese proceedings. An anti-suit injunction was granted on the basis that SDHX could not found a claim on rights arising out of the settlement agreement without honouring the arbitration clause in that contract.
In this case, the arbitrator had found that pursuant to the arbitration clause in the bills of lading, the insurer as assignee owed an equitable obligation to the owner/carrier not only not to sue it otherwise than in accordance with the arbitration clause but also not to sue the charterer in respect of a dispute falling within the arbitration clause. This was an extension of the DRO but not an impermissible one.
The issue was whether equitable compensation was recoverable in such a case. While there was no previous decision in which financial compensation had been awarded in such circumstances, the Court concluded that there should be a monetary remedy for breach of a DRO, or extended DRO. This was irrespective of whether a declaration or anti-suit injunction was available.
Among other considerations, the Court noted that the absence of a right to recover could lead to the prospect of abuse. A party might assign its rights to an assignee so that the assignee could sue in the non-contractual forum without running the risk of having to pay monetary compensation. It would also create the risk of forum shopping by a party with a DRO. The Court further noted that an anti-suit injunction might not be available or might be of no effect and an injunction by an arbitrator might not be recognised. The appeal was, therefore, dismissed.
Prestige
The Court’s decision in London Steam-Ship Owners’ Mutual Insurance Association Ltd -v- The Kingdom of Spain (Prestige) [2023] EWHC 2473 (Comm) is the latest in a long line of Court decisions and arbitration awards arising from the sinking of the Prestige in 2002. In very simple terms, Spain had commenced and pursued Spanish civil court proceedings against the owners’ P & I Club pursuant to a direct right of action under Spanish statute. Spain brought the proceedings both on its own behalf and also on the basis that it was subrogated to the claims of various claimants whom it had compensated for losses caused by the pollution from the vessel. The Club contended that Spain was obliged to pursue these claims in London arbitration pursuant to a binding obligation to do so in the Club Rules.
In arbitration, the tribunal granted the Club a declaration that Spain had breached its equitable obligation not to pursue certain claims against the Club otherwise than by way of London arbitration. The tribunal also found that the Club was entitled to compensation for Spain’s breach of its equitable obligation to arbitrate. The tribunal further thought it had the power to grant the Club an anti-suit injunction but awarded damages in lieu. Spain challenged the award in Court.
The Court noted that, among other things, the tribunal had relied on the decision in the Frio Dolphin in deciding the equitable compensation issue. The Court reached the same conclusion as the tribunal and found no reason to depart from the Frio Dolphin. Spain had breached an equitable obligation which was equivalent to the contractual obligation which the insured itself would have owed. There was no reason why there should not be a corresponding monetary remedy for breach of the equivalent equitable obligation.
The Court added that it would be a sensible incremental development of the law to recognise the availability of equitable compensation in such a case as this. While the Court found that the arbitrator had no power to grant an injunction against Spain (due to state immunity) or damages in lieu of such an injunction, there was nonetheless no good reason why the availability of a financial remedy in such a situation should be tied to the availability of an injunction.
Comment
The English decisions provide the answer to a question that had previously remained unanswered by the English courts. It is likely that the issue will come before the Court of Appeal at some point in the future (potentially in the Prestige?).
In the meantime, it is clear that, so far as the English courts are concerned, third parties such as insurers or assignees who take the benefit of a contract incorporating an arbitration clause are obliged to bring their claims in arbitration.
For further information, please contact:
Alexander Freeman, Partner, Hill Dickinson
alexander.freeman@hilldickinson.com
