The Commercial Court has clarified the application of the conditional benefits principle to assignees of guarantees in the shipbuilding context. In MS “V1” GmbH & Co KG, MV “V2” GmbH & Co KG v SY Co., Ltd, the Court reaffirmed that assignees who have taken the benefit of such assignments continue to be subject to an equitable “derived rights obligation” which compels them to resolve disputes in accordance with the terms of the guarantee, writes Aidan Ho, Trainee Solicitor.
Facts and background
In 2006, the defendant, a ship-building company, entered into two materially identical shipbuilding contracts with the original buyers of those vessels. Article 9 of each agreement dealt with the “Warranty of Quality”. Article 9(a) provided that the Builder (defendant) would guarantee the relevant vessel “against all defects…provided such defects have arisen within a period of twelve (12) calendar months as from the date the Vessel was delivered to and accepted by the Buyer”. However, the Builder’s guarantee obligation was qualified by Art. 9(d)-(f). These sub-clauses provided, in brief, that the Builder would have no liability in respect of defects discovered after the expiry of the guarantee; that the Builder would be released from all liability other than during the guarantee period; and that the guarantee was exclusive and the Buyer was waiving their rights to any other remedy.
Furthermore, Art. 9(g) provided that “any dispute under this Article shall be referred to arbitration” in London according to English law and on LMAA Terms.
The shipbuilding contracts were then novated to another buyer in 2007. ‘Guarantee Agreements’ were signed on delivery of the vessels in 2010 between the seller, novated buyer, and a wholly different set of parties – the claimants – in which the relevant claimant were described as “Second Buyer”; the Guarantee Agreements provided for the Vessel to be passed from the novated buyer to the claimant(s) and for claims under the Art. 9 guarantee to be assigned from the novated buyer to the claimant(s). Some guarantee claims arose and remedial work undertaken which were settled without the need for arbitration.
In 2019, the claimants purportedly discovered asbestos in the vessels and subsequently brought an action in tort and under Chinese product safety law in the Nanjing Maritime Court in China. The defendant challenged the Chinese court’s jurisdiction and ultimately the Chinese court declined jurisdiction because there was a valid arbitration agreement between the parties which required the dispute to be referred to London arbitration, and the claimants had commenced the underlying arbitral proceedings. (The claimants have appealed.)
Indeed, in 2019, the claimants had initiated London arbitration proceedings, to which the defendants replied denying that an arbitration agreement existed between the parties. The claimants subsequently proposed a stay of proceedings which the defendants rejected.
In 2023, the claimants wrote to the defendants proposing to discontinue the London arbitration, having decided that there was no arbitration agreement between the parties. The defendants responded with an assertion that an arbitration agreement did exist between the parties, i.e., a reversal of the parties’ positions.
The claimants subsequently applied for an order from the tribunal declaring that they had no jurisdiction to decide the matter. In the event, the tribunal determined that they did have jurisdiction to determine whether the exclusions in Art. 9 applied to the Chinese claims as a matter of English law.
Submissions
The claimants then challenged the substantive jurisdiction of the tribunal under s67 of the Arbitration Act 1996. In short, the parties’ submissions were as follows:
- The claimants submitted that they were not under a “derived rights obligation” because their Chinese claims were based on tortious rights under Chinese law which they were entitled to pursue as the owners of the vessels in question, and those rights were independent of their assigned contractual rights under Art 9.
- Even if they were subject to such an obligation to commence arbitration proceedings, that only extended to situations where they were seeking to enforce their Art 9 rights.
- The defendants argued that their defence in the Chinese proceedings were predicated on the exclusions within Art 9. Since there was a dispute between the parties as to whether the Art 9 exclusions also excluded liability for the alleged Chinese statutory torts, the proper application of the conditional benefits principle meant that the claimants had to refer the dispute to arbitration.
Commercial Court judgment
HHJ Pelling KC upheld the order of the Tribunal and dismissed the claim. The judge concluded that the tribunal did have jurisdiction to determine whether the exclusions in Art 9 could apply to the Chinese statutory torts as a matter of English law. This is because the claimants – having derived their contractual rights from an assignment of those rights – could not act inconsistently with pre-existing qualifications to those rights. Hence, in a dispute over whether the Art 9 exclusions might apply to the claimants’ Chinese statutory tort claim in China, and where such a dispute had to be submitted to arbitration under Art 9(f), the claimants could not try to avoid their obligation to arbitrate.
Having reviewed the authorities, the judge ruled that it was not the claimants’ purported assertion of an independent right to bring a claim (in relation to the Chinese statutory tort claims) that was material to the issue of jurisdiction. In fact, it was the existence of a dispute which engaged the issue of jurisdiction; in Airbus SAS v Generali Italia SpA and others (2019), the Court of Appeal ruled that the commencement of foreign proceedings by the defendant insurers of an airline constituted a breach of an equitable obligation which was equivalent to a breach of contract (which would have been the case if the airline itself (as insured) had brought those foreign proceedings). Furthermore, in The Prestige (No 4) (2021), the Court of Appeal ruled that disputes which fall within the scope of an arbitration agreement obliges any party bound by said agreement to refer the dispute to arbitration. The obligation of the third party seeking to enforce an assigned right subject to an arbitration agreement arises as soon as the defendant party disputes that claim.
HHJ Pelling KC rejected the claimants’ submission that the derived rights obligation did not apply to them because, they said, the claims being made were drawn from Chinese statute law and not from the Guarantee Agreements; and a result, that obligation did not extend to such statutory rights. The judge, however, distinguished the previous authorities relied on by the claimants. In the instant case, the inconsistency was not that a claim had been brought merely by an assignee or subrogated party. Instead, the inconsistency arose from the fact that the claimants had been assigned guarantee rights from which they could (and did) benefit; there was a dispute as to the applicability of the Art 9 exclusions which was “an essential part” of those rights; and the claimants’ Chinese claims had been made “in the face” of that dispute. Thus, those guarantee rights were qualified by such constraints. “Applying the conditional benefit principle, the claimants as assignees could not take the benefit of the guarantee without also being bound by the qualifications that applied to it” – i.e., the Art 9 exclusions. The crux of the issue was that Art 9(g) had provided for disputes over the Art 9 exclusions to be referred to London arbitration; since the claimants had benefitted from their rights under the guarantee, they were obliged to arbitrate.
In deciding whether Art 9(g) applied to disputes over the applicability of the exclusions to a non-Art 9 claim, the judge declined to apply the presumption in favour of a “one-stop” forum under Fiona Trust v Privalov [2007] UKHL 40, instead applying the usual principles of construction. The judge ruled that a dispute as to the exclusions clearly fell into the category of “any dispute under this Article” – the parties had used unambiguous language and a reasonable person with all the background knowledge reasonably available to the parties at the time of contracting would have understood the meaning of that language. Indeed, the judge stated that the parties had clearly contemplated that assignors and assignees might bring a claim in respect of non-Art 9 rights and a dispute would arise as to the Art 9 exclusions.
Finally, the judge dismissed the claimants’ submission that their so-called independent tort claim entitled them to avoid London arbitration because the tribunal had asserted jurisdiction over the applicability of the Art 9 exclusions, not the claims which the claimants had commenced in China. Since such a dispute fell within the scope of Art 9(g) as a matter of construction, it followed that the conditional benefits principle as explained above compelled the claimants to arbitrate that dispute in London.
Comment
The principle laid down by the court extends and clarifies English law’s approach to the conditional benefits principle and the derived rights obligation, of which the court characterised as being an aspect of that principle, in the context of shipbuilding guarantees. Assignees who benefit from rights under guarantees are bound by jurisdiction clauses in those guarantees where there is a dispute over the scope of exclusions in those guarantees. This is the case regardless of whether the claimants are pursuing ‘independent’ or related claims in foreign proceedings. The assignee’s obligation to arbitrate (if there is such a provision) is made the more important if the clause is broadly drafted to catch most if not all the disputes that might arise under the guarantees. Importantly, this obligation does not arise as a matter of contract but rather a matter of equitable obligation imposed by the court, because the nature of those rights arises from an assignment and not a novation.
Parties who are routinely engaged in buying second-hand vessels from the original buyers must therefore carefully consider the scope and extent of jurisdiction clauses in both the assignment and any builder’s guarantee that might form part of the original shipbuilding contract. Appropriate diligence and consideration of jurisdictional issues will ensure that parties and their representatives resolve disputes in a manner consistent with the contractual scheme agreed by the original parties to the contract. Indeed, on a related note, it appears that the court may embrace the risk of parallel proceedings (notwithstanding its disadvantages) where this possibility is within the original parties’ contemplation. Parties may therefore wish to align governing law and jurisdiction clauses in multiple linked contracts as closely as possible to avoid the risk of ‘forum fragmentation’.