SHIPOWNERS’ MUTUAL PROTECTION AND INDEMNITY ASSOCIATION (LUXEMBOURG) V CONTAINERSHIPS DENIZCILIK NAKLIYAT VE TICARET AS (THE “YUSUF CEPNIOGLU”)  EWCA CIV 386
David Lewis QC and Oliver Caplin acted for the respondent charterers in the title case, which has provided a firm steer from the Court of Appeal on the approach to be taken to anti-suit injunctions where derived rights are concerned.
On 20 April 2016 the Court of Appeal handed down judgment in favour of the respondent P&I Club (the “Club”) in The Yusuf Cepnioglu, maintaining an anti-suit injunction that had been granted at first instance.
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). In reaching its conclusions, the Court recognised that its two previous decisions in The Hari Bhum (No. 1)  1 All ER Comm (715) and The Jay Bola  2 Lloyd’s Rep 279 were irreconcilable, and preferred the latter.
The case also further delineates the approach that should be taken to characterisation of a foreign right of direct action (previously addressed in The Prestige (No. 2)  2 Lloyd’s Rep 33 (CA)).
In 2014 the m/v YUSUF CEPNIOGLU (the “Vessel”), which at the time had been chartered to Containerships (“Charterers”), grounded off the coast of Mykonos. It was a total loss. Charterers suffered substantial cargo claims against them pursuant to a number of charterers’ bill of lading, in total amounting to some US$13m.
The Owners of the Vessel appeared to be insolvent, leaving Charterers with no meaningful prospect of making a recovery for their potential losses if the cargo claims proved to be successful. 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 Club. Charterers’ direct action proceedings in Turkey are hereafter referred to as the “Turkish Proceedings”.
Direct action statutes effectively allow a third party 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 (under which the victim would otherwise have no rights as a non-party). Such statutes are an exercise in “victim protection”, an increasingly important public policy objective of lawmakers in Europe and beyond. In England, the equivalent piece of legislation is the Third Parties (Rights Against Insurers) Act 1930 (soon to be repealed, and replaced with the 2010 version).
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 Owners had first paid damages 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 would have 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. The concern for the Club, however, was that they might not be entitled to rely on the pay to be paid rule if the dispute was litigated in Turkey – and so might well face a judgment from the Turkish Proceedings requiring them to pay out to Charterers.
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 claiming under that contract via a direct action (which is what the Club argued in substance Charterers were doing), then the only forum to do so was London arbitration. The Club therefore obtained an ex parte antisuit injunction enjoining the Turkish Proceedings.
In the Commercial Court, Charterers sought to have the injunction set aside. Teare J declined to set-aside the anti-suit injunction but granted Charterers permission to appeal: see The Yusuf Cepnioglu  1 All ER (Comm) 966.
The legal issues in the Court of Appeal
The first key issue was the “characterisation” of the nature of Charterers’ cause of action under the Turkish statute in the Turkish Proceedings. This is the process by which the English Court decides if the claimant in the foreign action is required to take due account of the obligations imposed upon the primary party to the underlying insurance contract (including, for example, the governing law and jurisdiction provisions).
Applying English conflict of laws rules, the Court determines whether the nature of the cause of action against the insurer under the particular foreign direct action statute is: (i) enforcement of rights contained in the underlying insurance contract between the original insured and insurer; or (ii) an entirely independent right of action between the third party victim and insurer, which is in substance 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 claimant under the foreign act should be bound by the governing law, jurisdiction, or any other clauses in the underlying insurance contract. 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 foreign claimant ought to be bound by (amongst others) the governing law and jurisdiction clauses from the contract. This opens up the door for the right of the insurer to insist upon compliance with the jurisdiction clause to 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 (No.2). The Courts will look to the substance of the foreign cause of action. In doing so the key determining factor will be the extent to which the insurer is able to rely in the foreign proceedings against the third party claimant on defences that it could have relied on against the original assured (had a claim been brought against it under the insurance contract).
Almost all, if not all, foreign direct action statues to some extent preserve some core parameters of the original insurance contract. Indeed, if they did not preserve matters such as the insured perils and ceiling of cover, they would impose liability upon an insurer in an impractically arbitrary manner. However, the result of the English Court approaching the issue of characterisation largely by reference to the presence or absence of these key defences, may be that only such an arbitrary foreign direct action statute will escape being categorised as in substance affording a third party claimant a contractual claim.
In the instant case the evidence suggested that the Club would likely be able to rely in the Turkish Proceedings on, amongst others, the following clauses from its insurance policy with Owners: the insured perils; the ceiling of cover; the time bar provision; a provision that recoverable losses had to occur during the currency of the policy; and (possibly) the English law and arbitration clause.
In light of this, the Court of Appeal affirmed Teare J’s decision on this issue, and characterised the Turkish Proceedings as an attempt to enforce the Club’s insurance contract with Owners.
The Judgment leaves barely any room for manoeuvre now for a third party claimant on this issue: it will be very difficult indeed to show that a foreign direct action statute gives rise to a truly independent cause of action cf a right that is seeking to enforce the terms of the underlying insurance contract.
Anti-suit injunction: 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 also held, however, 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 foundations for obtaining anti-suit relief that Millett LJ identified in the 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, and so had not themselves made a promise to the Club that they would not pursue claims outside arbitration. Accordingly, he held that Charterers could not technically be in “breach of contract” (ie. in breach of the arbitration agreement).
The Court of Appeal reversed this decision. Its reasoning, following The Jay Bola, was 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 held that there was no distinction of principle between the above scenario (which is settled law) and the position of a third party claimant suing under a direct action statute that was, in essence, enabling that claimant to enforce the underlying insurance contract. It made no difference that the third party claimant had neither made a promise to the insurer not to sue outside of arbitration, nor had by way of assignment or subrogation become a conventional transferee of the original assured’s rights under the insurance contract.
To reach this conclusion, the Court of Appeal recognised it needed to, and then did, reject the contrary and irreconcilable analysis in The Hari Bhum (No.1) (where the Court of Appeal in materially similar circumstances had held that the position of a direct action statute claimant was in principle different to that of a subrogee/assignee/ transferee). The key tenet in the presently constituted Court of Appeal’s approach is the right of a party to have its English law rights protected from infringement by successors to the contractual rights of the originally contracting parties. The mechanism by which successors to those original rights appear on the scene, which is somewhat of a grayscale, is not important: rather it is a more binary question of whether a party’s original bargain is being undermined or not. If it is being undermined by a third party whose claim is characterised as contractual, the English Court will act to preserve as against the third party the rights afforded to the original promisee.
The corollary of the Court’s 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 need 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. That, on one view, is a departure from the more orthodox view that comity does have an important role to play as a check and balance to the exercise of the Court’s extra-territorial jurisdiction in granting anti-suit relief.
That is perhaps even more the case when the premise of the Court’s power to grant an injunction is the process of characterisation, in which the English Court deems the nature of the foreign cause of action through the application of English conflict of law principles. There is every possibility that the jurisdiction in which the foreign direct action statute has been enacted would not itself consider a claim thereunder to be contractual by reference to its own conflict of law principles. This phenomenon is sometimes described as the “conflict of conflicts” problem. It begs the appropriateness of the English Courts’ approach, which now arrogates determination of the nature of a foreign right to itself via its own conflicts of law principles through characterisation, and then uses the result of that very English process as a platform on which, having marginalised the role of comity, to justify enjoining the foreign proceedings.
Conclusions and Key Points
- Causes of action under foreign statutes that provide for direct actions against insurers are far more likely to be characterised by the English Courts as attempts to enforce the underlying insurance contract than independent rights.
- As a result, P&I Clubs, and indeed all insurers, are therefore in a strong position when seeking to restrain third parties through anti-suit relief from litigating against them around the world under such statutes, insofar as such litigation is inconsistent with English jurisdiction or arbitration provisions contained in their policy terms.
- Where an application for an antisuit injunction is founded upon a breach of contract, considerations of comity are unlikely to be relevant, and if they are, are unlikely to constitute “good reasons” for why an injunction should not be granted.
- In this context, there is no distinction of principle between a third party asserting rights as an assignee/subrogee under an insurance (or indeed any other) contract, and a party asserting such rights when they have been provided by a direct action statute. The Hari Bhum (No.1) is no longer good law on this issue.