Introduction

In Argos Pereira España SL and another v Athenian Marine Ltd [2021] EWHC 554 (Comm), the English High Court held that an assignee acquiring the right to claim under a contract via subrogation could be ordered to pay equitable compensation if it fails to comply with the arbitration clause that binds the original parties to the contract. The Court has clarified the law in terms of the availability of equitable compensation flowing from a breach of equitable obligations to arbitrate, as well as the “transferred loss” principle for parties wishing to recover wasted costs incurred by a non-party to a contract.

The dispute and the subsequent arbitration

The dispute stemmed from a shipment of frozen seafood under bills of lading that are governed by English law. Upon arrival in Spain, defects in the cargo were discovered. The insurer of the consignee (the “Insurer”) subrogated the claim and brought Court proceedings in Spain against Lavinia Corporation (“Lavinia”), being (1) the manager of the vessel’s owner (the “Owner”), and (2) the vessel’s charterer. This was done in breach of the arbitration clause in the bills of lading (which required disputes to be submitted to arbitration in London), and also on the mistaken assumption that Lavinia was the carrier. While Lavinia at last succeed in challenging the jurisdictional issue in the Spanish Court proceedings, it was only awarded its costs in the sum of €8,425, leaving costs in the sums of €55,850.60, US$893.75 and £86.684.45 irrecoverable (the “Irrecoverable Costs”).

The challenge to the arbitral award

Given the situation, when arbitration proceedings in London were later on commenced by the Insurer, the Owner counterclaimed to recover the Irrecoverable Costs paid by Lavinia. The sole arbitrator ordered the Insurer to make good the Irrecoverable Costs to the Owner (the “Arbitral Award”), for the reasons that the consignee and the Insurer were both in breach of their contractual obligation to arbitrate under the arbitration clause by bringing Court proceedings in Spain. In response, the Insurer and consignee challenged under section 69 of the English Arbitration Act 1996 on the basis of error of law since:

1.         the consignee did not bring the Court proceedings in Spain; and

2.         while the Insurer did bring the Court proceedings in Spain, it did not have the contractual obligation to arbitrate.

The English Court was then asked to determine whether the Award was correct by deciding on the following questions:

1.         whether an assignee of cargo claims under bills of lading (i.e. the Insurer) can be held liable to pay equitable compensation to the carrier (i.e. the Owner) 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? (the “Equitable Compensation Question”); and

2.         if so, whether the carrier can rely on the principle of “transferred loss” to claim such equitable compensation in respect of legal costs incurred by a third-party (i.e. Lavinia) in defending the assignee’s claim in a foreign court, where the carrier itself was not the defendant and did not suffer any such loss? (the “Transferred Loss Question”)

The Equitable Compensation Question

It was common ground between the parties that although the Insurer was not a party to the bills of lading containing the arbitration clause, there were still two (relatively new) kinds of equitable obligations in this case: (1) “Derived Rights Obligations”, and (2) “Inconsistent Claim Obligations”. The former can be formulated as: where a party has a right derived under a contract, it can only exercise the same in accordance with the forum clause set out in the contract from which its rights are derived. The latter concerns 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 to which that contract is subjected, even in circumstances where the foreign defendant denies that it is a party to the contract on which it is being sued.

To this, the Court first commented that the Derived Rights Obligations are equitable obligations that are equivalent to contract. Building on this, the Court did not disturb the sole arbitrator’s finding that the Insurer owed an equitable obligation to not only not sue the Owner, but also to not sue non-parties such as Lavinia in relation to disputes that fell within the scope of the arbitration clause. While this might be an extension of the Derived Rights Obligations, it is not “an extreme or unlikely” one so such extension was to be permitted. However, the Court recognized that whether equitable compensation is available in the current situation is up for debates. It then considered authorities submitted by the Owner’s counsel, along with the submission that “the assignee becomes a party to the extent that it cannot enforce its derived right without the concomitant obligation to arbitrate and to that extent becomes bound”.

At last, the Court held that it would not disturb the sole arbitrator’s decision to award the Irrecoverable Costs on the grounds that (1) there is no case law precluding the availability of equitable compensation for a breach of the Derived Rights Obligations, and (2) such a conclusion is compatible with logic and equity.

The Transferred Loss Question

The second question for the Court was to consider who could claim the compensation, i.e. “whether [the Defendant] was entitled to recover damages in respect of the loss suffered by [Lavinia] under the principle of ‘transferred loss’, on the basis that [the Defendant] and [Lavinia] were closely related companies.”

The principles of transferred loss were addressed most recently by the Supreme Court in Swynson Ltd v Lowick Rose LLP [2018] AC 313, in which Lord Sumption sets out the requirements that (i) there must be a known object to benefit a third party or a class of persons to which the third-party belong; (ii) a breach of the duty must be likely to cause that third party loss; and (iii) it is not available for that third party who has a direct right of action to recover the loss.

The Court found a known object by referring to the sole arbitrator’s findings that the arbitration clause was intended to benefit Lavinia, being a closely related company to the Owner. The outstanding issue therefore is whether denying compensation to the Owner would leave Lavinia without any way to recover its loss. After the Court opined that Lavinia had no derived right itself under the contract to enforce the claim, the Court considered whether Lavinia would be entitled to damages under s.50 of the Senior Courts Act 1981 in lieu of an injunction. As the Court admitted the considerable uncertainty as to the availability of the remedy of s.50 damages in lieu of an injunction, the Court did not consider that the arbitrator had erred on the transferrable loss point.

Accordingly, the Court dismissed the Insurer’s appeal and upheld the sole arbitrator’s award, allowing the Owner to recover the Irrecoverable Costs.

Conclusion

This decision is significant because, while it is well-established that where a party who derives its right of claim from a contract, whether by virtue of an assignment or statues or otherwise, must bring its claim in accordance with the jurisdiction clause (if not an injunction can be obtained to prevent such party from pursuing proceedings in breach of the jurisdiction clause), it had not been determined until this case that a party who derives rights from a contract, such as a subrogated insurer or assignee, may be held liable to pay equitable compensation in breach of an equitable obligation to arbitrate claims. This case is also a useful precedent for parties who wish to recover wasted costs incurred by group companies. In the absence of other remedies, these parties may be able to rely on the principle of “transferred loss” to recover their wasted costs.