Ulgener

DIRECT ACTION IN TURKEY
Is it possible ?

Fehmi Ülgener
Duygu Yazıcı
Gül Alpay
Ceren Doğdu
Aybike Kopuz
Emre Ülgener

INTRODUCTION

This time we bring you a subject that is probably a bit controversial and has caused some debate.

A direct action against P&I clubs is indeed a challenge to the global third party insurance system and should of course be treated with utmost care. Clubs naturally only want to be sued under the terms of the insurance contract, including the choice of law and jurisdiction they have agreed with the member (the “preferred system”). On the other hand, there are cases where a different law and jurisdiction may take precedence over the terms of the contracts and this is where things get complicated. You will see that, at least from a Turkish law perspective, there are cases where P&I clubs can protect themselves against a breach of the preferred system, but there are also cases where local (in this case Turkish) law does not give way to this system, resulting in having to apply local law and jurisdiction. As demonstrated below, sometimes it is the preferred system that wins, sometimes it is the local law and jurisdiction; this depends on the factors that will be evaluated below.

DIRECT ACTION IN TURKISH LAW

The Turkish Commercial Code (“TCC”), which came into force in 2012, has granted third parties who have suffered damages the right to apply directly to the liability insurers (protection and indemnity – P&I clubs) with Article 1478. According to this article:

“The injured party may claim compensation for the damage they have suffered directly from the insurer up to the insured amount, provided that it remains within the statute of limitations applicable to the insurance contract.”

The reasoning of this article states that the main purpose of liability insurance is to compensate the damages of the injured third parties and to protect them against insolvency. According to the reasoning, "...the main purpose of liability insurance is to compensate the decrease in the insured's assets due to the compensation to be paid by the insured because of the damage caused to the third party, and as a side effect, to ensure that the injured party's damage is remedied as soon as possible and to protect third parties against the insured's insolvency...".

A number of international conventions such as the 1969 and 1992 CLC, the 2001 Bunker Convention, the HNS Convention, the 1974 Athens Convention and the 2007 Nairobi Convention have already developed systems that allow the injured parties to apply directly to the insurer. In addition to these, the TCC also allows the injured third parties to apply directly to the liability insurer with the regulation mentioned above.

However, in our opinion, in order to examine the issue more comprehensively, it is necessary to separate the source of the legal relationship (debt/claim) that causes the damage into two as contractual relations and tort.

a.
Claims Based on Contractual Relations

In cases where there is a contractual relationship between the injured party and the insured (such as charter party), in order for the article 1478 of the TCC to be applied, the insurance policy should be subject to Turkish Law and/or the insurer should be based in Turkey.

For instance, in cases filed against the shipowner due to damages to the cargo, the Turkish Courts reject the cases filed directly against the P&I insurer if the insurance contract is subject to English Law, on the grounds of the existence of the “pay to be paid” rule[1] and/or the Turkish Courts not having jurisdiction over the dispute. As will be explained in more detail under other headings of this article, in English Law, third parties do not have the right to file a lawsuit directly against the P&I clubs, except for some exceptions.

Although the courts previously rejected cases filed against the foreign P&I insurers due to the existence of the pay to be paid rule in the insurance contracts, they have recently cited Article 46 of the Turkish Private International and Procedural Law (“International Procedural Law”) as the reason for rejecting these claims.

Article 46 of the International Procedural Law is a special article for cases related to insurance contracts. According to it, “In disputes arising from insurance contracts, the court of the place where the insurer's actual headquarters or its branch or the agency that concluded the insurance contract is located in Turkey is competent. However, in cases that are filed against the insured or the beneficiary, the competent court is the court of the place where they are domicile or resident in Turkey.”

While Turkish Courts have been rejecting cases filed for cargo damages against insurers that do not have a residence or agency in Turkey based on this article in recent years, it is not yet clear whether the Turkish Labour Courts will apply this article when it comes to crew claims (labour accidents) or whether they will consider this article to conflict with the social state or public order since there is no precedent on this issue yet.

Undoubtedly, if the insurer is based in Turkey, it is possible for the third party who has suffered damage (whether due to cargo damage or a work accident) to apply directly to the insurer, but it should be noted that this application is limited to compensation payments only. To give an example, while it is possible to claim compensation from the insurer due to a work accident, it is not possible to claim severance pay, notice pay, leave pay, etc. from the insurer.

b.
Claims Based on Tort

While the “pay to be paid” rule is generally upheld by Turkish courts in contractual disputes, its enforceability is called into question when the underlying dispute arises from a tort. Under Turkish law, the distinction between contractual and tortious liability is crucial in determining whether the “pay to be paid” rule can be invoked. Courts tend to respect the terms of the insurance contract — including the “pay to be paid” rule — when the claim is based on a contractual relationship. However, in cases based on tort, the claimant (injured party) cannot be bound by the terms of the insurance contract.

Article 34 of the International Procedural Law governs the applicable law in tort cases. 

Tort
Article 34 –  
(1) Obligations arising from torts shall be governed by the law of the country where the tort was committed.         
(2) If the place where the tort was committed and the place where the damage occurred are in different countries, the law of the country where the damage occurred shall apply.
(3) If the obligation arising from the tort is more closely connected with another country, the law of that country shall apply.     
(4) If the law applicable to the tort or to the insurance contract permits, the injured party may assert their claim directly against the insurer of the liable party.
(5) The parties may explicitly choose the applicable law after the tort has occurred. 

According to this provision, the law of the place where the tort occurred (Turkey) — or, if different, the place where the damage was sustained — shall apply. Most importantly, paragraph 4 of Article 34 expressly provides that, if the applicable law governing either the tort or the insurance contract permits, the claimant may bring a direct action against the insurer.

Article 1478 of the TCC, grants the injured party a statutory right to claim compensation directly from the liability insurer. Therefore, where Turkish law governs the tortious dispute, the claimant is entitled to bypass the insured and proceed directly against the P&I club, regardless of any “pay to be paid” provision in the policy. Turkish courts have consistently recognised this right.

In practice, courts have refused to apply the “pay to be paid” rule in tort-based claims involving casualties such as pollution incidents and collisions. The rationale is rooted in the protection of the injured party, who should not be prejudiced by the internal arrangements between the insured and their insurer and to ensure that the injured party of a tort is able to seek compensation from the financially solvent insurer.

Accordingly, where the claim arises from tort and Turkish Law is applicable pursuant to International Procedural Law Article 34, the P&I club cannot rely on the “pay to be paid” clause to avoid direct liability.

 DIRECT ACTION IN OTHER JURISDICTIONS

a. English Law

Under English law, the exception to the “pay to be paid” rule is personal injury and loss of life.

Pursuant to the Third Parties (Rights Against Insurers) Act 1930 (“Third Parties Act”), if the insured/ shipowner becomes insolvent, the injured party may bring a direct action against the club in case of personal injury and loss of life.

The Third Parties Act was amended in 2010, where the revised provisions came into force in 2016. According to the revised Third Parties Act, the “pay to be paid” rule does not apply to compensation claims arising from loss of life or personal injury where the owner is insolvent. This amendment was introduced following the judgments delivered by the House of Lords in the consolidated cases of The Fanti and The Padre Island.

According to the Third Parties Act 1930;

Section 9- Conditions Affecting Transferred Rights:

9.1: "This section applies where transferred rights are subject to a condition (whether under the contract of insurance from which the transferred rights are derived or otherwise) that the insured has to fulfil."

9.5: "The transferred rights are not subject to a condition requiring the prior discharge by the insured of the insured's liability to the third party."

9.6: "In the case of a contract of marine insurance, subsection (5) applies only to the extent that the liability of the insured is a liability in respect of death and personal injury."

In both cases mentioned above, the cargo interests, who were unable to recover their losses from the insolvent owners, brought claims against the clubs under the Third Parties Act. In the Fanti case, the court held that the liability amount imposed on the owner under the Third Parties Act had transferred to the third party, meaning the “pay to be paid” rule could not be enforced against the injured party. However, in the Padre Island case, the court ruled that the “pay to be paid” rule applies and that the club’s obligation to indemnify cannot arise before the compensation determined by the court has been paid by the owner to the injured party.

Both cases were appealed and eventually heard together by the House of Lords. The House of Lords ruled that the “pay to be paid” rule applies, in line with the decision in the Padre Island case, on the following grounds:

• There was no provision or wording in the Third Parties Act that eliminate the “pay to be paid” rule in the event of the insured’s insolvency,
• The transfer of rights under section 1.1 of the Third Parties Act places the injured party in an advantageous position, which was considered unlawful, and,
• Even if it was accepted that a right is transferred to the injured party, such right is merely the insured’s right of recourse against the club, subject to the necessary conditions, and would therefore have no legal effect in the hands of anyone other than the insured, rendering it meaningless for the injured party.

As a consequence of this decision, in 2010 the law maker made an amendment to ensure that claims arising from loss of life or personal injury are exempt from the “pay to be paid” rule where the owner is insolvent.

Under the amended Third Parties Act, "insolvency" is defined as the following:

• For individuals: (i) Debt Relief Order, (ii) Administration Order, (iii) Individual Voluntary Arrangement, and (iv) Bankruptcy Order.
• For corporate bodies: (i) Administration Order, (ii) Voluntary Arrangement, (iii) Provisional Liquidator, (iv) Commencement of liquidation either by itself or by court order, resulting in removal from the Companies Register, and (v) Dissolved company.

According to the general provisions concerning the application of the Third Parties Act,

1. The right to bring a claim against the P&I clubs is subject to a six-year limitation period, which begins: for tort claims, from the date the wrongful act occurred, and for contract claims, from the date of the breach.
2. The injured party acquires the same rights against the P&I club as the insured. The club may still raise any defences it would have had against the insured. Furthermore, the club may deduct unpaid premiums from any indemnity payable and reduce compensation proportionally in cases where the injured is partially at fault.

The clubs within the International Group, on the other hand, exercise their discretionary right to make payment directly to a third party. They have considered it fair and reasonable that injured third party receive compensation directly from the club without applying any policy defences such as “pay to be paid” or withdrawal of cover for non-payment of premiums and calls if there is no enforceable right of recovery against any other party and the seaman or defendant would otherwise remain uncompensated

b. EU Law

“The Assens Havn” Case

The Court of Justice of the European Union (“CJEU”) orders that the right of an injured party to bring a direct action against the insurer is not restricted to the jurisdiction specified in the choice of law clause of the insurance contract (13 July 2017). According to this decision, the following courts are deemed competent to hear such a claim:

• the court of the place where the damage occurred, or
• the court of the insurer’s headquarters within the EU, or
• the court of the place where the injured party is domiciled within the EU.

The dispute arose when the tug Endevour I, operated by a Swedish company as owner, collided with a quay at Assens Port in Denmark in November 2007, causing damage. Before legal action could be initiated, the tug owner declared bankruptcy and liquidation proceedings were commenced. Consequently, the port authority launched a case in Denmark against the tug owner’s P&I club, relying on Section 95(2) of the 1930 Insurance Act, which grants injured parties the right to bring direct claims against the liability insurer of an insolvent debtor.

The Danish court of first instance ruled in favor of the P&I club, declaring itself lacking jurisdiction and dismissing the case. This decision was appealed by the claimant, and the appellate court referred the matter to the CJEU, suspending its own proceedings until the CJEU issued its judgment.

The CJEU ruled in favour of the claimant. The key reasons provided were as follows:

• The applicable legislation should aim to protect third parties, which necessitates granting jurisdiction to the courts of the place where the damage occurred.
• The insurance contract should not bind an injured party who has no knowledge of or involvement in that contract.

c. Norwegian Law

“MV Stolt Commitment v. MV Thorco Cloud” Case

The reason why we decided to review Norwegian law under a separate heading (though it is not a member of the EU) is because there are two Norway-based P&I clubs within the International Group (IG). These clubs issue insurance policies governed by Norwegian law. Two recent decisions under Norwegian law are of particular relevance:

• According to a 2018 judgment of the Norwegian Supreme Court, Norwegian courts (subject to the fulfillment of certain conditions) have jurisdiction to hear claims brought against Norwegian-based P&I clubs and liability insurers.
• In an April 2020 decision, the Norwegian Court of Appeal held that, where the insured is legally insolvent, injured parties have a right to bring direct claims against Norwegian P&I clubs.

The reasoning provided in the 2020 decision includes the following points:

• The collision occurred in Indonesian territorial waters; neither vessel was owned by a Norwegian party.
• Under Norwegian law, if the insured is legally insolvent, a statutory provision grants injured parties the right to bring a direct action against the insurer.
• The Norwegian-based P&I club is subject to Norwegian law, and the insurance contract itself refers to Norwegian law and jurisdiction. Therefore, the P&I club should be aware of the risk that direct claims may be brought against it.

However, in order for the right of direct action to be validly exercised, the injured party must prove that the insured is legally insolvent. This requirement essentially constitutes a precondition for exercising the right. In this context, the provisions of Norwegian bankruptcy and insolvency law become particularly relevant — which naturally goes beyond the scope of this article and our area of specialisation.
 

ANTI-SUIT INJUNCTION

An anti-suit injunction (“ASI”) (a method used in English law) is a court order that restrains a party from initiating or continuing proceedings in a foreign jurisdiction, typically to uphold an arbitration agreement or exclusive jurisdiction clause. In the context of marine insurance, ASI’s are often sought by P&I clubs in UK to prevent direct claims in other jurisdictions.

From the perspective of English law, ASI’s serve as a critical tool to protect the contractual dispute resolution framework agreed between the club and the member. English courts may grant such orders against the parties who initiate proceedings in foreign courts because according to English law this is not only against the conditions of the contract but also vexatious or oppressive. There is no need to explain it but, the insurer must act promptly and must not participate in any way in such proceedings. 

As explained above, Turkish Law permits direct actions against third party insurers in certain circumstances particularly where the claim is based on tort and Turkish law is the applicable law pursuant to Article 34 of the International Procedural Law. In such cases, Turkish courts allow the claimant to bypass contractual limitations, including the ‘pay to be paid’ rule and exclusive jurisdiction agreements.

Such injunctions obviously do not have any effect on Turkish proceedings. The main reason for this is that ASI decisions are seen as restricting the “freedom to seek legal remedies”. Therefore, an injunction that prevents an injured party from bringing an action before Turkish courts is deemed to be contrary to public order and thus cannot be recognized.

However, this does not mean that ASI decisions are without effect. Even if the Turkish court does not recognise such a decision, a party that fails to comply with an ASI may face a series of sanctions under English law. In particular, if the claimant initiating proceedings in Turkey holds assets in the United Kingdom, conducts commercial activities there, or has a presence in a country that recognises ASI’s, the following sanctions may be imposed under English law:

• Fines or imprisonment for failure to comply with a court order.
• Seizure or freezing of assets located in the United Kingdom or in jurisdictions that recognize ASI’s.
• Reputational and financial obstacles such as the cancellation of insurance cover or an increased credit risk in commercial dealings.
• As a consequence, an exposure to high legal costs and compensation liabilities before English courts.

Therefore, the fact that Turkish courts do not recognise injunctions does not eliminate their power. In practice, these sanctions may adversely affect the claimant’s economic, commercial, psychological and legal standing, effectively pressuring them to withdraw the case in Turkey.

A concrete example of this situation occurred in the Yusuf Cepnioglu case. After a vessel ran aground and was deemed a total loss off the coast of Greece, the injured party initiated direct proceedings in Turkey under Article 1478 of TCC against the P&I club.

The club argued that the lawsuit violated the terms of the insurance policy, which required arbitration under English law, and obtained an ASI from the English courts. The English court found that the Turkish proceedings imposed additional obligations on the club outside the contractual framework and characterised the lawsuit as “vexatious and oppressive.” As a result, the English court granted ASI.

Although the Turkish court continued with the proceedings, the injunction had a practical impact due to the charterer’s commercial presence and assets in United Kingdom. Under the threat of sanctions as described above, the claimant left without an alternative but to withdraw the case.

This example clearly demonstrates that ASI decisions, while not recognised under Turkish law, can nonetheless exert significant deterrent and practical effects at the international level.

Therefore, this issue, raises the following question: If the injured party brings a direct action against the club before the Turkish courts, and the court accepts its jurisdiction, hears the case and renders a judgment in favour of the injured party, how can the injured party enforce such a judgment? A judgment rendered by a Turkish court would not be recognised or enforced in UK as an English court would not enforce a judgment which is considered to be a “contempt to an English court”. However, does this mean that an injured party holding such a judgment would be left entirely without recourse?

According to the Article 89/1 of the Enforcement and Bankruptcy Law No. 2004:

“If a claim or other right that does not belong to the bearer or is not supported by a negotiable instrument or a movable property of the debtor in the possession of a third party is seized, the enforcement officer shall notify the debtor (whether a natural or legal person) that from that point onward, the debt must be paid only to the enforcement office, and that any payment made to the enforcement debtor shall not be valid or that the third party holding the movable property shall be instructed to deliver the asset only to the enforcement office and not to the enforcement debtor; otherwise, the third party will be held liable to pay the equivalent value of the asset to the enforcement office. (Notification of seizure)”

Without going into a detailed legal discussion, it would seem that the above mentioned clause has a potential use against P&I clubs.

CONCLUSION

As a result, if the incident causing the damage (whether material or loss of life/personal injury) occurred in Turkey and is based on tort, the injured party can bring a direct action against the P&I clubs according to Article 1478 of the Turkish Commercial Code. On the other hand, for the claims arising out of contract (such us cargo damage) tendency of Turkish courts is to dismiss such cases due to lack of jurisdiction.

As for the ASI, although it has no direct effect on Turkish proceedings, a claimant who fails to comply with an ASI may face a series of sanctions under English law including but not limited to fines or imprisonment or seizure or freezing of assets located in the United Kingdom or in other jurisdictions that recognize ASI’s.

---

[1] In P&I insurance policies, the “pay to be paid” rule stipulates that the insurer’s liability is conditional primarily upon the insured having paid the third-party/claimant.