England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand. London. WC2A 2LL
		02/10/2007

THE HON. MR. JUSTICE ANDREW SMITH :

1. The claimants, the owners of the vessel "Front Comor", bring these applications against RAS Riunione Adiriatica Sicurta SpA and Generali Assicurazioni Generali SpA, the insurers of Erg Petroli SpA ("Erg"), who are the owners of an oil refinery in Syracuse, Sicily, and were also the charterers of the vessel under a charterparty on amended Asbatankvoy form dated 24 July 2000. The charterparty contained the standard Asbatankvoy form arbitration agreement and provided for London arbitration.
2. The claimants seek, first, declarations that the defendants are obliged to refer "any and all disputes arising out of the charterparty to arbitration in London in accordance with the terms of the charterparty, and that the disputes which are subject to proceedings brought by the insurers (as I shall call the defendants) in the courts of Syracuse are disputes arising out of the charterparty and are to be determined by London arbitration. Secondly they seek an order under section 18 of the Arbitration Act 1996 as to the constitution of the arbitration tribunal. This judgment deals with the latter, and I shall invite submissions about the declarations in light of it.
3. The insurers and Erg have been served with the proceedings, but they have not appeared before me. The owners are represented by Mr. David Bailey QC, to whom I am grateful for his careful submissions upon a point of some interest.
4. The background to this case is described by Mr. Justice Colman in a judgment dated 21 March 2005, [2005] EWHC 454 (Comm), [2005] 2 Lloyd's LR 257, and in paragraphs 2 and 5 of his judgment he explained:

"The insurers had insured [Erg]... In August 2000 the vessel collided with an oil jetty at the Erg refinery and caused a great deal of damage. The jetty was put out of operation. Erg suffered losses not only in respect of repair costs, but also by reason of disruption of refinery operations and liabilities to pay demurrage to third parties. The insurers have paid Erg a total of €15,587,292.66 under the policies... . In August 2000 Erg commenced arbitration proceedings against the owners in London, confining their claims to uninsured losses. In respect of the insured losses the insurers have in their own name commenced court proceedings against the owners in the Tribunale di Syracuse in Sicily. In doing so they rely on their rights of subrogation under article 1916 of the Italian Civil Code and claim the amount which they paid to Erg...".

He continued (at paragraph 6)

"It is clear that the issues of liability which arise between the insurers and the owners in the Syracuse court proceedings are substantially the same as those which arise in the arbitration. The main issue is in both cases whether the owners are protected by the errors of navigation exclusion in clause 19 of the charterparty or by article IV, rule 2(A) of the Hague Rules. Although Erg's claim is confined to its uninsured losses there is a complete overlap between the arbitration and the Syracuse proceedings in as much as the owners counterclaim a declaration in the arbitration that they are under no liability for damage caused by the collision."

5. Mr Justice Colman granted the owners an anti-suit injunction restraining the insurers from taking any steps in relation to disputes arising out of the charterparty except by way of arbitration in London in accordance with the terms of the charterparty, and in particular from proceeding with the Syracuse action. He also made declarations similar to those which are sought in these proceedings. The insurers appealed in respect of the injunction to the House of Lords under the "leapfrog" procedure (in section 12 of the Administration of Justice Act 1969). The appeal was heard in December 2006. In February 2007 the House of Lords referred to the European Court of Justice this question:

"Is it consistent with EC regulation 44/2001 for a court of a Member State to make an order to restrain a person from commencing or continuing proceedings in another Member State on the ground that such proceedings are in breach of an arbitration agreement?"

There was no challenge to the declaratory relief granted by Mr. Justice Colman, and nothing in the decision of the House of Lords ([2007] UKHL 4) casts doubt upon the correctness or appropriateness of the declarations that he made.

6. The arbitration proceedings commenced in August 2000 are before a tribunal comprising Mr. Michael Baker-Harber, Sir Brian Neill and Mr. David Johnson QC. Mr. Baker-Harber was appointed by the owners "in respect of all disputes arising out of the charter of their vessel to Erg...". Erg appointed Sir Brian Neill "in respect of the ad hoc reference... and in respect of any and all disputes arising under the charter". Mr. David Johnson QC was appointed by the other two arbitrators. The insurers had made no payment to Erg before the tribunal was constituted, and therefore there was then no question of them having acquired rights against the owners under article 1916 of the Italian Civil Code or on any other basis. The reference has progressed between the owners and Erg in that, as Mr. Justice Colman states, pleadings are closed and disclosure is substantially complete.
7. The insurance contracts are governed by Italian law, and there is no dispute that that law governs the relationship between Erg and their insurers, and determines the insurers' subrogation rights. As a matter of Italian law, on payment of Erg's claim on 27 June 2002 the insurers became subrogated to Erg's rights against the owners in respect of Erg's losses up to the amount of the indemnity paid, and, as Mr. Justice Colman found, became entitled to enforce those rights in their own names, while Erg remains entitled to claim in their own name in respect of the uninsured losses. Both Erg's claim and, as Mr Justice Colman held, the insurers' claim are subject to the arbitration agreement. The owners dispute both the claim for the insured losses and the claim for the uninsured losses. There are therefore disputes arising out of the charterparty (a) between the owners and Erg, and (b) between the owners and the insurers. The owners seek to resolve the disputes by obtaining declarations against Erg and the insurers that they are under no liability for any of the losses. Their purpose in making these applications is to bring it about that they can pursue their claim for such declarations in London arbitration in accordance with the arbitration agreement in the charterparty and do so in the single reference before the existing tribunal.
8. I readily accept that there is good reason to achieve this purpose if it can properly be done in accordance with the principles of law governing arbitration and in accordance with the provisions of the Arbitration Act 1996. Mr. Bailey argues that the court has the necessary powers and should exercise them. His reasoning is as follows:

i) The insurers are party to the arbitration agreement for the purposes of part I of the Arbitration Act 1996.

ii) There are more two parties to the arbitration agreement because the owners and Erg also remain party to the arbitration agreement.

iii) The arbitration agreement provides no agreed machinery to cater for the position where there are more than two parties to it, or to a dispute to which it relates.

iv) In these circumstances, the court has power under section 18(3)(b) of the 1996 Act to direct that the tribunal already constituted to determine the owners' dispute with Erg should also determine the dispute between the owners and the insurers; and also has power under section 18(3)(d) to make appointments of Mr Baker-Harber, Sir Brian Neill and Mr David Johnson QC to determine the dispute between the owners and the insurers.

v) The court should exercise that power.

9. Before I comment upon this reasoning, I should set out the terms of the arbitration provision in the charterparty:

"Clause 24.

"ARBITRATION. Any and all differences and disputes of whatsoever nature arising out of this charter shall be put to arbitration in the City of New York or in the City of London whichever place is specified in Part 1 of this charter pursuant to the laws relating to arbitrations there in force before a board of three persons, consisting of one arbitrator to be appointed by the owner, one the charterer and one by the two so chosen. The decision of any two of the three on any point or points shall be final. Either party hereto may call for such arbitration by service upon any officer of the other, wherever he may be found, of a written notice specifying the name and address of the arbitrator chosen by the first moving party and a brief description of the disputes or differences which such party desires to put to arbitration. If the other party shall not, by notice served upon an officer of the first moving party within 20 days of the service of first such notice, appoint its arbitrator to arbitrate the dispute or differences specified, the first moving party shall have the right without further notice to appoint a second arbitrator, who shall be a disinterested person with precisely the same force and effect as if said second arbitrator had been appointed by the other party. In the event that the two arbitrators fail to appoint a third arbitrator within 20 days of the appointment of the second arbitrator, either arbitrator may apply to a Judge of any court of maritime jurisdiction in the city abovementioned for the appointment of a third arbitrator, and the appointment of such arbitrator by such Judge on such application shall have precisely the same force and effect as if such arbitrator had been appointed by the two arbitrators... "

10. For the first step in his submissions Mr. Bailey relies upon section 82(2) to the Arbitration Act 1996: "References in this part [part I] to a party to an arbitration agreement include any person claiming under or through a party to the agreement". On the face of it the words "any person claiming" might be given a narrower or a wider meaning: a narrower interpretation limiting the term to persons who have invoked the arbitration machinery to made a claim (which the insurers have not done), or a wider interpretation including any person who (as the insurers do in the proceedings in Sicily) asserts a right which, if disputed, would have to be enforced through the procedure stipulated in the arbitration agreement. Mr. Bailey submits that the term is to be given the wider interpretation, and there is authority that supports his submission: see Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Company Ltd. (no 2), [2005] EWHC 455 (Comm), [2005] 2 Lloyd's LR 378 at para 28 per Moore-Bick J. I respectfully agree with the views of Mr. Justice Moore-Bick about this for the reasons that he gives, and there is no point in me repeating or seeking to recast them. I therefore accept the first stage of Mr. Bailey's reasoning.
11. The second step in Mr Bailey's reasoning is directed to section 16 of the Arbitration Act 1996 (which is in part I of the Act and therefore the definition in section 82(2) applies to it). Section 16 provides that "The parties are free to agree on the procedure for appointing the arbitrator or arbitrators", and goes on to provide for the position "If and to the extent that there is no such agreement". After dealing with the positions if there is to be a sole arbitrator, if there are to be two arbitrators, if there are to be three arbitrators and if there is to be a tribunal of two arbitrators and an umpire, the section continues (at subsection (7)): "In any other case (in particular, if there are more than two parties) section 18 applies as in the case of the failure of the agreed appointment procedure".
12. In this case there are now more than two parties to the arbitration agreement. The original parties, the owners and Erg, remain parties to it, and since making their claim against the owners in the Syracuse proceedings (if not before, by virtue simply of asserting their claim at an earlier date) the insurers have become parties to it.
13. That is not to say that the insurers have become parties to the proceedings before the tribunal. Mr Bailey does not contend that they have done so, recognising that this would go against the decision of the Court of Appeal in Baytur SA v Finagro Holding SA. [1992] 1 Lloyd's LR 134. In the Baytur case, after the dispute had been referred to a GAFTA tribunal for arbitration and before any award was published, the buyers, a French company, had ceased to exist because by an agreement called a Traite de Scission the shareholders agreed that the company should be split into two. The effect of that under French law was that the assets and liabilities of the old company were transferred to one or more other companies and the transferor company was dissolved as soon as the transfers were completed. The relevant rights and obligations of the buyer were transferred to the defendants, the GAFTA arbitrators made an award in their favour, and that award was upheld by the Board of Appeal of GAFTA. Mr Kenneth Rokison QC, sitting as a Deputy Judge of the High Court, held that the awards of the arbitrators and of the appeal panel were nullities, and the Court of Appeal agreed with his decision.
14. In this context and with the parties not disputing that the transferees were equitable assignees of the claim, Lord Justice Lloyd, who delivered the only reasoned judgment of the Court of Appeal, said (at p. 151/152): "An assignee does not automatically become a party to a pending arbitration on the assignment taking effect in equity. Something more is required. He must at least give notice to the other side, and submit to the jurisdiction of the arbitrator. ... [T]his was never done. ... What is the consequence? The immediate consequence was, undoubtedly, that the arbitration lapsed. An arbitration requires two or more parties. There cannot be a valid arbitration where one of the two parties has ceased to exist." Here, of course, there is no question of the arbitration lapsing because the owners and Erg remain party to it.
15. In reaching its decision in the Baytur case the Court of Appeal considered two first instance judgments: that of Mr Justice Phillips in The London Steamship Mutual Insurance Association Ltd. v Bombay Trading Co Ltd. (The "Felicitie"). [1990] 2 Lloyd's LR 20 (note) and the judgment of Mr Justice Hobhouse in Montedipe SpA v JTP-Ro Jugotanker (The "Jordan Nicolov"). [1990] 2 Lloyd's LR 11. In the former case Mr Justice Phillips (at p.27) described as "unsound in law and impossible in practice" the suggestion that a person acquiring under the Third Party (Rights against Insurers) Act 1930 rights which were being pursued in arbitration automatically replaced the insured as party in the reference upon the insured being wound up. I refer to two of his reasons (expressed at p.26):

i) The 1930 Act cannot operate so as to transfer to the third party acquiring rights under it the right to recover costs expended by the insured and it would not seem right that the third party should automatically find himself potentially liable for costs expended by the insurer nor that the insurer should be constrained to accept a substitute for the party initially liable for his costs.

ii) Mr Justice Phillips thought the idea that a third party should become party to an arbitration without notice "a startling concept and one that cannot operate in practice", and said that some procedural mechanism was required to substitute one party for another, whether in arbitration or in litigation.

16. In The "Jordan Nicolov", charterers made a short delivery claim against owners and it was referred to arbitration pursuant to the charterparty. After the reference Italian insurers paid the charterers in respect of the shortage and their lawyers telexed the owners saying that they were acting for the owners "as assignees" of the charterers, but notice of the assignment or transfer of rights was not given to the arbitrators. When this communication was put in evidence at the arbitration hearing some years later the Tribunal concluded that there was a possibility that the effect of the assignment was that title to sue passed to the insurers. Without making any finding on the point, they pointed out that one of the arbitrators had been appointed by the charterers, not the insurers, and if an award was now to be made in favour of the insurers, a fresh arbitration reference would be required but a claim in a new reference would have been time-barred. Accordingly the arbitrators dismissed the claim. Mr Justice Hobhouse said that they had erred in holding that the insurers could not rely upon the appointment of a tribunal by the charterers and intervene in the arbitration, but that in the circumstances title to sue (that is to say, whether the charterers or the insurers were entitled to pursue any claim) had not been proved.
17. In his judgment Mr Justice Hobhouse considered the judgment of Mr Justice Phillips in The "Felicitie", and pointed out that in the case of a transfer by way of legal assignment the question of an automatic transfer without notice does not arise and in order to affect the position of the arbitrators as well as the person liable notice of transfer must be given to them as well. As for the concern expressed by Mr Justice Phillips about potential liability for costs, Mr Justice Hobhouse said (at p. 19):

"As regards previous costs neither the respondent in the arbitration nor the arbitrators are obliged to accept any substitute for the contractual liabilities of the assignor. An assignment in contrast to a transfer or novation, does not relieve the assignor of his liabilities nor does it, any way as regards matters preceding the notice of assignment, affect the rights of the other party or parties against the assignor. Therefore, this point is not persuasive in relation to a legal assignment. As regards the subsequent costs of the arbitration, the intervention of the assignee clearly is a submission to the jurisdiction of the arbitrators and therefore, in addition to confirming the capacity of the arbitrators to make an award in favour of or against the assignee on the substantive claim, includes the acceptance that the arbitrators shall have in relation to the assignee the discretion to award costs conferred by s.18 of the Arbitration Act 1950"

18. Mr Justice Phillips had also expressed concern about the practical complication that might arise if claims had been advanced in an arbitration commenced by an insured against more than one third party or in respect of both third party liability and another head of loss suffered by the insured, observing (at p.26) that "Automatic transfer would in those circumstances seem to result in different claimants with different interests being compulsorily joined in the same arbitration". Of this Mr Justice Hobhouse said (at p. 19),

"For myself I do not see any theoretical or practical difficulty about this aspect of the problem. It is possible in arbitration as in litigation to have more than one claimant and to have more than one claim that has been referred."

19. Mr Justice Hobhouse therefore concluded that the application of principle to the position where a legal assignee had given notice to the person liable demonstrated that generally, being entitled under section 136 of the Law of Property Act 1925 to exercise all the legal remedies of the assignor, where remedy by way of arbitration had been properly invoked by the assignor, the assignee was entitled to enforce that same remedy, and was not driven to seek a new or different remedy.
20. Thus the authorities establish that an assignee or other transferee of a right which is subject to a reference to which the assignor or transferor is party does not automatically become party to the arbitration.
21. This leads to the third and fourth steps in Mr Bailey's argument. I readily accept that the arbitration agreement does not contemplate that there might be more than two parties to the dispute that is referred to arbitration under it. It contemplates that two arbitrators shall be appointed, each by one of two parties, and it does not contemplate either that there might be a party to the dispute who does not appoint an arbitrator or that the parties to the dispute should appoint more than two arbitrators between them.
22. Does it follow that the court has power under section 18 of the 1996 Act to make the direction sought by the owners? It seems to me that this is the effect of section 16(7), but there are two points to consider further.
23. First, Lord Justice Lloyd in the Baytur case and Mr Justice Hobhouse in The "Jordan Nokolov" referred to the need for the transferee to submit to the jurisdiction of the arbitrators if he is to become party to the reference. I do not, however, interpret these authorities as deciding that the court does not have power to make a direction under section 18 of the Act where the transferee of the rights does not voluntarily submit to the jurisdiction of the arbitrators. That question did not arise in either case because the courts were considering whether and how the transferee might pursue claims in an arbitration and not about claims that might be made against the transferee. Whatever precisely the courts had in mind when referring to submission to the jurisdiction of the arbitrator, it is clearly not unusual for a party to an arbitration agreement to be required reluctantly, or involuntarily, to respect the arbitration agreement and be bound by the award of the tribunal whether or not he participates in the reference and, in that sense, he submits to its jurisdiction simply because he is bound by the arbitration agreement. I find it difficult to see why a person to whom rights which can be enforced only through arbitration have been transferred (automatically or consensually) and who asserts those rights is not to be taken thereby to have accepted by acquiring and asserting those rights the incidental burden (if it is so to be characterised) of being subject, in relation to the transferred rights, to the obligations and limitations of an arbitration agreement to which the transferor was party. To my mind it is only a question of terminology whether the transferee is to be characterised as submitting to the jurisdiction of the arbitrators (either in any event or at least if the reference has already been brought). None of the considerations which dissuaded Mr. Justice Phillips from concluding that a transferee under the 1930 act was party to the reference seem to me to apply in these circumstances.
24. The second matter for consideration is whether there is, in fact, a single dispute to which the owners, Erg and the insurers are all parties and whether there has been a failure of the agreed appointment procedure so as to engage section 16(7) of the 1996 Act. Might the proper view rather be that there was and continues to be a dispute between the owners and Erg which has been properly referred to arbitration and there has now arisen a separate dispute between the owners and the insurers which is subject to the arbitration agreement and which can be referred to a tribunal in the usual way? It is true that this might bring about the inconvenient result that the two disputes are determined by differently constituted tribunals, but this is a familiar problem where related disputes between different parties are to be determined by arbitration.
25. To my mind, it is not realistic to see the owners as being involved in two separate disputes with different parties. Their dispute with the insurers is part and parcel of the same dispute as that to which Erg and the owners alone were party before the insurers paid the claim. Mr Justice Hobhouse emphasised in The "Jordan Nicolov" (loc cit at p. 19) that the remedy that the assignee might enforce was "the same remedy, not a new or different remedy". Similarly here, as I see it, the owners were and are seeking to resolve the same dispute before and after the payment by the insurers.
26. I add that the owners might with some justification consider it harsh if, because of the payment by the insurers, they should be exposed to separate arbitration proceedings against Erg and against the insurers. In the case of assignments, as observed in Smith, The Law of Assignment (2007) para 13.06, "The law is very sensitive to the fact that the debtor should not be prejudiced by an assignment which, after all, can occur without his consent and against his will", and I see no reason that the law should be less sensitive when the rights are transferred as they have been in this case.
27. I therefore conclude that in the circumstances of this case the court has jurisdiction to exercise its powers under section 18(3) of the 1996 Act. It seems to me that justice to the owners requires me to exercise it. The insurers and Erg have not put forward reasons that I should not do so. The arbitrators have been informed of this application and raised no objection.
28. I shall therefore make an order as sought by the owners under section 18 of the 1996 Act and invite submissions as to the precise form of order.