QCR Spring 2021: Argos Pereira España SL and another v Athenian Marine Ltd  EWHC 554 (Comm)
Equitable Compensation for Failure to Comply with Arbitration Clause
Arbitration Clause – subrogated underwriter – irrecoverable costs – principle of transferred loss – Derived Rights Obligation – right to compensation
The Frio Dolphin (“Ship”) is a refrigerated cargo carrier owned by Athenian Marine Ltd (“Owners”). The Ship carried a cargo of frozen fish and squid to be discharged in Spain. The Owners issued bills of lading (governed by English law) for the cargo which contained a law and jurisdiction clause providing that disputes arising under the bills of lading were to be determined in arbitration in London.
At the discharge port upon arrival, the goods were found damaged. The receivers and consignees under the bills of lading were indemnified by their insurers. The consignee’s subrogated cargo insurers then commenced proceedings in Spain against Lavinia Corporation, the Owners’ managers and the charterers of the Ship assuming incorrectly that Lavinia was the contracting carrier under the bills of lading. In the first instance, Lavinia failed to challenge the claim on jurisdictional grounds but that decision was overturned on appeal and Lavinia was awarded its costs only in a nominal amount but having incurred substantial irrecoverable costs ("the irrecoverable costs"). The Owner then pursued in arbitration in London a claim to recover the irrecoverable costs paid by Lavinia in the Spanish proceedings. The basis for the claim advanced was that although the insurers were not a party to the bills of lading, thus, could not be liable for damages for breach of contract, they owed an equitable obligation to pursue their claim in arbitration in London in accordance with the law and jurisdiction clause in the bills of lading, and that an equitable compensation was available for the breach of such an obligation. The Owners further argued that while the loss had been suffered by a third party (Lavinia) and not the Owners, the Owners were still permitted to recover equitable compensation under the principle of ‘Transferred Loss’ which was considered by the Supreme Court in the case of Lowick Rose LLP (in liquidation) v Swynson Ltd  UKSC 32.
The position in the case law is well-established that where a claimant is not a party to a contract but derives its right of suit from a contract, whether by virtue of an assignment, subrogation or direct action statute, the claimant must bring its claim in accordance with the forum clause in the contract. It has also been established that in the event that such a claimant does not bring its claim in accordance with the forum clause in the contract, an injunction can be obtained to prevent the claimant from pursuing proceedings in breach of the forum clause. However, considering that an ordinary claim for damages for breach of contract cannot be advanced in such a situation where the claimant is not a party to the contract, the court had to determine whether a party in the Owners’ position could also advance a claim for equitable compensation (i.e. a Derived Rights Obligation, “DRO”).
In the judgment, it was held that there was no authority which deterred the judge from concluding that there should not be equitable compensation for breach of a DRO, including an “extended DRO”, irrespective of and additional to the remedies of injunction and declaration. The judge also accepted Owners’ Counsel’s argument that the absence of a right to recover compensation could lead to the prospect of abuse by a party assigning its rights to an assignee so that the assignee could sue in the non-contractual forum without risk of compensation and potentially giving the opportunity for impermissible forum shopping by a party with a DRO.
Furthermore, the court held that the principle of transferred loss applied. In the award, the arbitrator had decided that the arbitration clause extended to claims brought not only against the Owners but also against Lavinia. On the permission for appeal stage, the insurers were refused permission to appeal against that finding under section 69 of the Arbitration Act 1996. Pursuant to that finding of fact by the arbitrator, the court held that the ‘known object’ of the arbitration clause was to benefit Lavinia and that the anticipated effect of a breach of equitable duty was to cause loss to Lavinia. It was further held that, if the claim by Owners was not allowed, Lavinia would have no entitlement of its own to claim the irrecoverable costs in the Spanish proceedings and Lavinia would be in a “black hole”. However, the court mentioned, in obiter, that it is possible for a party in Lavinia’s position to recover damages instead of an injunction under section 50 of the Senior Courts Act 1981 in lieu of an injunction, had Lavinia sought one, even if that injunction was an available remedy.
As a result, the owners were entitled to claim all of Lavinia’s irrecoverable costs of the Spanish proceedings from the subrogated insurers.
This is the case for the first time that determined whether a party in the Owners’ position could bring a claim for equitable compensation in circumstances whereby a claimant with derived rights of suit under a contract by way of an assignment or subrogation or by statute, does not bring its claim in the agreed forum set out in the contract.
The judgment provides useful guidance on equitable compensation under a DRO, including “extended DRO”, the principle of transferred loss and the particular concern of forum shopping by an assignee suing in a non-contractual forum without having the risk of compensation.
The right to compensation is particularly a valuable remedy where an injunction or declaration is not available or appropriate. The decision is therefore of particular importance in extending the range of remedies available to a party who can demand compensation for the benefit of a third party which was incorrectly sued outside the contractual forum, in breach of the contractually agreed forum even where such proceedings were brought in the name of a party with derived rights such as a subrogated insurer or assignee.
This case is being appealed. It will be interesting to see how those issues will be determined by the English Court of Appeal in the near future.