Think Recoveries: Case Update - Subrogated Underwriters Left to Fill Costs 'Black Hole'

This is a significant decision establishing that a subrogated cargo insurer’s failure to comply with an English law and jurisdiction agreement within a contract of carriage can result in them being held liable for equitable compensation under English law.  

Facts

The Defendant, Athenian Marine Ltd, owner (the "Owner") of the m.v. "FRIO DOLPHIN" (the "Vessel") carried frozen seafood on board the Vessel pursuant to Bills of Lading subject to English law and London arbitration.  Damage to the cargo was discovered upon arrival in Vigo, Spain. 

The Second Claimant, the subrogated insurer (the "Cargo Insurer") commenced proceedings in Spain against the Owner's manager and the Vessel's charterer, Lavinia Corporation ("Lavinia").  The Cargo Insurer did not proceed against the Owner. 

Lavinia successfully challenged jurisdiction in Spain on appeal.  Lavinia, however, was only awarded costs amounting to Euro 8,425, leaving them out of pocket for irrecoverable costs of Euro 55,850.60, USD 893.75 and GBP 86,684.45.  The Owner sought to recover Lavinia's irrecoverable costs in arbitration by way of a counterclaim to the Cargo Insurer’s claim and was successful.

The Commercial Court dismissed the Cargo Insurer's appeal under section 69 of the Arbitration Act 1996 (the "Act") against the decision of the Arbitrator in favour of the Owner on its counterclaim. 

Equitable obligations – DRO or ICO?

The parties agreed that there were two kinds of equitable obligations in play:

1. Derived Right Obligations ("DROs") arising as a result of the Cargo Insurer having derived the right to issue proceedings against the Owner under the Bills of Lading by way of subrogation.  In exercising this right, however, the Cargo Insurer had an equitable obligation equivalent to a contractual obligation to do so in accordance with the forum clause in the Bills of Lading from which its rights were derived. 

2. Inconsistent Claim Obligations ("ICOs") arising with the intention of restricting vexatious or unconscionable conduct.  The Cargo Insurer had an obligation not to take the benefit of being able to sue under the Bills of Lading without the burden of the exclusive forum clause to which the Bills of Lading were subject, even in circumstances where Lavinia denied that it was a party to the Bills of Lading on which it was sued.    

The Arbitrator had found that the Cargo Insurer, as assignee under the Bills of Lading, owed a DRO to the Owner (i) to sue the Owner in accordance with the arbitration clause and (ii) to not sue Lavinia in respect of the cargo claims which fell within the remit of the arbitration clause.  The Cargo Insurer argued that the Arbitrator's extension of the DRO to (ii) was incorrect.

Waksman J, however, refused permission to appeal against the Arbitrator's decision in this regard.  Consequently, the Cargo Insurer could not challenge the Arbitrator's factual finding.  The Court nevertheless noted that the Arbitrator's extension of the DRO was "not an extreme or unlikely one".

Instead, the Court considered the following questions:

1. Whether the Cargo Insurer could be held liable to pay equitable compensation to the Owner for breaching an equitable obligation to arbitrate the cargo claims in England having brought proceedings in Spain against the charterers/managers Lavinia; and
2. If the answer to 1) was yes, could the Owner rely on the principle of "transferred loss" to recover Lavinia's irrecoverable costs in the Spanish litigation in spite of Lavinia being the party which suffered the loss?

Question 1: Equitable compensation

The parties agreed that there had not been a case in which equitable compensation had been awarded for breach of a DRO (or an ICO) and, as such, if compensation was to be awarded here, it would be a first.  Indeed, the Cargo Insurer argued that there was substantial evidence from previous cases to suggest that such compensation was not available and that the appropriate remedy was injunctive relief.  

The Owner asserted that the categories of breaches of obligation for which equitable compensation could be awarded were not closed.  They also noted that if the DRO was an obligation equivalent to a contractual obligation, there was no reason why damages should not be recoverable.  They argued that the failure to award compensation in such circumstances could weaken the force of, and respect for, forum clauses if an assignee such as the Cargo Insurer could sue in a non-contractual forum without the risk of paying compensation.  This could result in abusive forum shopping by parties with a DRO. 

The Court found in favour of the Owner's "powerful case".  It held that the Arbitrator was correct in finding that there should be equitable compensation for breach of a DRO, including an 'extended' DRO not to sue Lavinia.  Further, monetary compensation was available and no authority restricted the scope of compensation solely to injunctive relief.

Question 2: Transferred Loss

The Arbitrator had found that as Lavinia were a closely related company to the Owner, the intention of the parties must have been for the arbitration agreement to extend to claims made under the Bills of Lading against Lavinia. 

Consequently, even though they were not a party to the contract, Lavinia as charterer and ship manager was entitled to rely upon the wide wording of the arbitration agreement and derive benefit from it. 

On the principle of transferred loss, the Court drew reference to the conditions for its application set out most recently by Lord Sumption in Swynson Ltd v Lowick Rose LLP [2020] QB 551 being instances where 'the known object of a transaction is to benefit a third-party or a class of persons to which the third-party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party'.  Here, the breach of the DRO owed by the Cargo Insurer to the Owner in failing to adhere to the forum clause and in suing in Spain could be anticipated to cause loss to Lavinia. 

Furthermore, if the Owner could not recover Lavinia's losses via the principles of transferred loss, the Court concluded that they would fall into a "legal black hole" as the DRO was owed to the Owner, not to Lavinia.  Lavinia's only option would be to enforce an ICO but the parties agreed that no equitable compensation would be available for breach of an ICO.  As the Court further considered that there was considerable uncertainty as to the availability of damages in lieu of injunctive relief, the appeal was dismissed.

Lavinia's irrecoverable costs in the Spanish proceedings were therefore held to be recoverable by the Owner from the Cargo Insurer in the London arbitration proceedings.

Conclusion

The decision is significant because it extends the sanctions which a non-contracting party deriving rights from a contract may face for failing to comply with an English law and jurisdiction agreement beyond an anti-suit injunction to monetary compensation.   

A cargo insurer must now be aware that non-compliance with an English law and jurisdiction agreement may expose them to the costs not only of the contractual carrier or vessel owner, but also those of non-contracting parties such as an owner's manager or vessel's charterer suffering financial losses as a result of non-compliance. 

As such, we anticipate there will be very few cases where cargo insurers will wish to commence proceedings outside of England when the contractual forum provides for English law and London arbitration or the jurisdiction of the English Courts.  

Since Brexit, some jurisdictions have been suggesting that it is possible to pursue claims outside of London contrary to a jurisdiction agreement in a contract of carriage.  This case demonstrates the dangers associated in doing so.  Should insurers be advised to pursue a recovery claim outside of the contractually agreed forum or jurisdiction, extreme caution should be exercised and professional advice sought.