In this article, we intend to answer this question and present a recent decision by the Brazilian Superior Court of Justice referred as a precedent in two cases handled by Siano e Martins Advogados (SMA), leading to the extinguishing of cargo claims wrongly brought before Brazilian Courts.
Cargo claims are frequently brought by insurers in Brazil based on the subrogation that entitles the insurer to take over all of the rights of the assured against the person responsible for the loss. Subrogation is set out by articles 728 of the Commercial Code and 786 of the Civil Code in the following words:
Article 728 - If the insurer pays damage to the subjected-matter insured, he will be subrogated in all rights and actions that the assured have against a third party;
Article 786 – Paid the indemnity, the insurer is subrogated, within the limits of the value, in the rights and actions of the assured against the person responsible for the loss.
Based on the above rules, subrogation places the insurer in the position of the assured and where the charterparty or bill of lading contain an arbitration clause, the insurer is bound by the term providing to arbitrate rather than litigate the cargo dispute.
Despite that, for many years until now, insurers have filed cargo claims in Brazil even if there was an arbitration clause in the charterparty or bill of lading based on the argument that subrogation would not transfer procedural rights and actions, but only substantive rights and in many occasions, they succeeded.
However, in June 2019, a decision by the Superior Court of Justice (SEC 14.930) brought light to the issue of the binding effect of the arbitration clause to insurers.
The facts and issues
Claimants entered in a contract for the supply of a steam generation system (“supply contract”) with a Brazilian company (the “Assured”). The Brazilian company had a property insurance policy with an Insurer (the “Insurer” or “Defendant”).
In August 2007, two incidents took place (a rupture in one of the boilers of the steam generator and fire in the bag house of the steam generator).
Following that, in May 2010 the Insurer indemnified the Assured for property damage and lost profits and in April 2014 commenced court proceedings in the Courts of Brazil, Rio de Janeiro against Claimants to recover the indemnity paid to the Assured.
In December 2014, Claimants commenced arbitration before ICC against the Insurer in accordance with the arbitration clause of the supply contract and in July 2015, the Arbitral Tribunal declared that Claimants were entitled to a declaration that the Insurer, as Assured’s subrogee, could not bring its claims in the Brazilian Litigation.
In order to give effect to this arbitral award in Brazil, in November 2015, Claimants asked the homologation of the arbitration award before the Superior Court of Justice.
In his judgment, Justice Og Fernandes (Reporter Judge) made the following question:
The question to be analyzed by this Special Court may be summarized as follows: the arbitration clause contained in a supply contract entered between the claimants of this application and third party [the Assured] may be extended to the defendant [the Insurer], by virtue of the subrogation, considering that the subrogated is placed in the same position of the assured?
In order to answer the above question, Justice Og Fernandes (Reporter Judge) made reference to the arbitration award that stated:
205. The words ‘rights and actions’ contained in article 786 of the Brazilian Civil Code include the arbitration agreement, either as a ‘right’ or as an ‘action.’ […]. 207. Furthermore, arbitration as a means to resolve commercial disputes is also an ‘action’, or remedy, in the sense of Article 786 of the Brazilian Civil Code. There is no doubt that the word ‘action’ contained in the provision of Article 786 means ‘right to sue’ it is also undisputed that a valid arbitration agreement creates a ‘right to sue’. 208. Either as a ‘right’ or an ‘action’, is it fair to understand that in the case at hand, the arbitration agreement has been transferred to [the insurer] by virtue of the subrogation under article 786 of the Brazilian Civil Code.
Then, he quoted the doctrine of Civil Law on subrogation and concluded that there wouldn’t be a violation of the public order by the homologation of the arbitration award.
In a strong assenting judgment, Justice Nancy Andrighi decided
[…] I understand that it is completely possible that the arbitration clause is transferred from the assured to the insurer by the subrogation, according to article 786 of the Civil Code (2002) and thus there is no national public order offence.
In the end, by a majority (9x3), the Superior Court of Justice granted the homologation of the arbitration award.
The Insurer filed a motion for clarification and it was rejected by the Superior Court of Justice on October 9th, 2019 and the decision became final on November 4th, 2019.
Two cargo claims, one precedent
As explained in the previous part, the recent decision given by the Superior Court of Justice (SEC 14.930) was not dealing with a cargo claim.
However, it is expected that the decision given by the Superior Court of Justice is going to be used as a precedent for cargo claims brought before Brazilian Courts where the charterparty or the bill of lading contain an arbitration clause.
In fact, two cases handled by SMA have already confirmed our expectations.
In the first case, a chemical cargo was loaded in apparent good order and condition but, when delivered it was said to be contaminated by the previous cargo loaded on the vessel.
The cargo insurer brought the case before 6th Commercial Court at Rio de Janeiro (first instance court) despite the arbitration clause in the charterparty providing for arbitration in London. The case was extinguished by the 6th Commercial Court at Rio de Janeiro and the cargo insurer filed an appeal.
The Court of Appeal at Rio de Janeiro (second instance court) analyzed the said appeal five days after the decision given by the Superior Court became public. The Court of Appeal at Rio de Janeiro upheld the decision by the first instance and referred to the previous decision by the Superior Court of Justice (SEC 14.930):
Despite the arguments presented by the insurer, stating that they are not bound by limitations not imposed by the law, referring to the arbitration clause inserted in the contract made between the assured and the carrier, we confirm the conclusions of the decision under appeal, and confirm the recent precedent of the Superior Court of Justice, that stated that the arbitration clause is binding to the insurer.
A motion for clarification was filed by the cargo insurer, but it was unanimously denied by the Court of Appeal at Rio de Janeiro on September, 3rd 2019.
In the second case, a cargo of eucalyptus pulp was said to be damaged during the sea carriage from Brazil to the Netherlands. The cargo insurer brought the case before 1st Civil Court at Vitória (first instance court) despite the arbitration clause in the charterparty providing for arbitration in London. The case was extinguished by the 1st Civil Court at Vitória that used as one of its arguments the decision given by the Superior Court of Justice in the SEC 14.930.
Cargo insurers will likely file appeals in both cases in due course. However, the three decisions (the precedent by the Superior Court of Justice and the other two by the Courts at Rio de Janeiro and Vitória) leads to the conclusion that where the underlying charterparty or bill of lading contain an arbitration clause, the cargo insurer is bound by the term providing to arbitrate rather than litigate the dispute.
See the full article here