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Arbitration clause not binding on insurer by way of subrogation
Oct 19 2010

In a directive issued in March 2009, the Supreme People's Court considered that an arbitration clause contained in a contract for carriage of goods by sea was not binding on an insurer that stepped into the shoes of the insured consignee by way of subrogation.

The plaintiff was the Beijing branch of the China Pacific Property Insurance Corporation. It commenced a lawsuit before the Tianjin Maritime Court against Beijing COSCO Logistics Co Limited and other defendants for damages by way of subrogation under a contract for carriage of goods by sea, which had been concluded between the defendants (as carrier) and the insured consignee. An arbitration clause in the underling contract for carriage of goods by sea provided that:

"any disputes arising out of or in connection with this contract shall be settled through amicable negotiation between the parties under the principle of mutual understanding and accommodation, failing which, any party can submit the dispute to arbitration before the China Maritime Arbitration Commission in accordance with the said Commission's arbitration rules effective at the time of submission. The arbitration shall take place in Beijing. The arbitration award shall be final and binding on any of the parties".

The defendants contested the court's jurisdiction, arguing that the underlying contract for carriage of goods by sea contained an arbitration clause. Therefore, they argued that any claims against the carrier by the plaintiff by way of subrogation should be submitted to arbitration before the China Maritime Arbitration Commission, and that the court had no jurisdiction over the disputes.

The Tianjin Maritime Court and the Tianjin Higher People's Court held that although the underlying contract for carriage of goods by sea contained an arbitration clause, the plaintiff (as insurer) was not party to the agreement to arbitrate and had never agreed to accept the arbitration clause. Therefore, the arbitration agreement was not binding on the plaintiff, and the Tianjin Maritime Court had jurisdiction. Since the case had an international element, in that one of the defendants was a foreign company, it was reported to and approved by the Supreme People's Court, according to the internal reporting requirement in relation to matters involving international arbitration.

It is generally accepted that when a claim or a debt is assigned, the arbitration agreement attached thereto is also assigned. The assignee becomes bound by the arbitration agreement unless it can prove that it was unaware of the existence of the arbitration agreement or expressly rejected it at the time of the assignment.

This principle was confirmed in the Interpretation of Several Issues for the Application of the Arbitration Law, issued by the Supreme People's Court in 2006. In the present case the courts distinguished an insurer's acquisition of claims by way of subrogation from contractual assignment; as a result, the doctrine of contractual assignment was inapplicable. As the Tianjin Higher People's Court stated in its opinion, the plaintiff as insurer acquired its right to claim against the defendants by way of subrogation according to statutory provisions of the Insurance Law, as Article 45(1) provides that:

"[w]hen the occurrence of an incident covered by insurance results from the loss or damage to the subject insured caused by a third party, the insurer shall, from the date when indemnity is paid to the insured, exercise by subrogation the right of the insured to demand indemnification against the third party up to the amount of indemnity paid".

In the opinion of Supreme People's Court, an insurer in such circumstances may decide whether to accept an arbitration agreement contained in the underlying contract which is the subject of the insurance coverage. The court stated that:

"[t]he insurer is not the party that negotiated and concluded the arbitration clause contained in the contract for carriage of goods by sea, the arbitration clause is not an expression of the insurer's will, unless the insurer expressly accepts it, [and therefore] the arbitration clause is not binding on the insurer".

In practice, insurance companies have more frequently accepted the arbitration clause contained in an underlying contract and pursued their claims through arbitration proceedings; when defendants have challenged the jurisdictions of the arbitral tribunals, the courts have consistently upheld the arbitral tribunals' jurisdictions over such claims.