Court considers equitable obligation to arbitrate dispute under shipbuilding contracts

MS “V1” GmbH & Co AG & another -v- SY. Co Ltd [2026] EWHC 52 (Comm)

This dispute, arising out of shipbuilding contracts and related warranty guarantees, highlights the different legal effect of a contractual novation as opposed to an assignment of rights. It also demonstrates the importance of considering the scope and effect of any contractual dispute resolution provision.

The background facts

The dispute related to two shipbuilding contracts entered into in November 2006, pursuant to which the defendant was the Seller/Builder.

Article 9 of each contract was the “Warranty of Quality” provision. Article 9(a) was a “Guarantee of Design, Material and Workmanship.” It covered defects that had arisen within 12 calendar months of the vessel having been delivered to and accepted by the Buyer. Sub-articles 9(d) to (f) set out the “Extent of the Builder’s Liability.”

Article 9(g) provided for any dispute under Article 9 to be referred to arbitration in accordance with Article 13. Article 13 provided for each contract to be governed by English law and for any disputes to be referred to LMAA arbitration.

In effect, therefore, Article 9 was intended to be a complete code by which the parties agreed to apportion the risks involved in defects to the vessels that first became apparent after delivery by the defendant providing the guarantees in Article 9 (a) on the basis of the exclusions and limitations that appeared in Articles 9(d)-(f).

In January 2007, each of the shipbuilding contracts was novated so that XY Carriers GmbH & Co KG (XY Carriers) became the Buyer under each contract.

The vessels were delivered in October/November 2010. Simultaneously with delivery, the claimants respectively entered into a "Guarantee Agreement", to which XY Carriers was also a party. Each Guarantee Agreement described the relevant claimant as the "Second Buyer." Pursuant to the Guarantee Agreement, the defendant as Seller undertook the liability under the Warranty of Quality provisions in Article 9 and agreed that any claims under Article 9 were assigned and transferred by XY Carriers GmbH to the claimants.

The Guarantee Agreements, therefore, assigned the benefit of the rights set out in Article 9 of the shipbuilding contracts to the claimants in respect of the ship they each acquired. However, the Guarantee Agreements did not operate as a novation and did not therefore make the claimants a party to the arbitration agreement referred to in Article 9 and/or 13 of the shipbuilding contracts.

Following delivery, guarantee claims were made and dealt with. Residual unresolved claims that each claimant had under the guarantees were then settled by commercial negotiation between the parties.

In 2019, surveys found asbestos on the vessels, and, in September 2020, the claimants commenced proceedings against the defendant, the insulation manufacturer and the vessel's classification society in the Nanjing Maritime Court (NMC). Those claims were non-contractual in nature and were available to the claimants by operation of Chinese statute law.

Arbitration/Chinese court proceedings

In October 2020, the claimants purported to initiate LMAA arbitration proceedings and appointed an arbitrator in respect of all disputes arising out of or in connection with the shipbuilding contracts, including any claims in tort or product liability claims.

The defendant denied that it had any contractual relationship with the claimants or that it had concluded any arbitration agreement with them. Nonetheless, the defendant appointed an arbitrator while reserving its rights.

The claimants did not pursue the arbitrations. Instead, they decided to pursue their claims in the NMC and sought to have the LMAA arbitrations discontinued. The defendant maintained that the NMC had no jurisdiction over the claimants’ alleged claims and that any claims had to be brought in LMAA arbitration. The defendant took the same position before the NMC.

In September 2023, the NMC dismissed the claimants' claims against the defendant on the basis that they had to be referred to arbitration in London and against the other defendants because they were not liable to the claimants in respect of the claims that had been made.

The claimants appealed from the NMC orders giving effect to these rulings. In January 2024, they also applied to the tribunals for an order declaring that they had no jurisdiction over the disputes that the claimants had referred to arbitration.

The tribunals did not address the issue whether they had jurisdiction to determine the issues arising in the NMC proceedings. Instead, each tribunal concluded that it had jurisdiction to hear and determine the question whether, as a matter of English law (as the express governing law of the shipbuilding contracts), the Article 9 exclusions of liability excluded actions in tort (or equivalent non-contractual civil liability under foreign law).

The claimants applied to the Court under s.67 of the Arbitration Act 1996, challenging the tribunals’ final declaratory awards on jurisdiction.

Equitable obligation to arbitrate

Derived rights refer to when a third party, such as an assignee or subrogee, seeks to enforce rights under a contract between two other parties. Under English law, an assignee takes the benefits of a contract but not the burdens.

However, the assignee/subrogee is under an equitable obligation to abide by any arbitration or exclusive jurisdiction provision in the underlying contract if it is claiming the benefits of the contract.

This is otherwise known as the conditional benefits principle, which means that if a third party seeks to enforce rights derived from a contract, it must also accept the obligations under that contract, including abiding by the dispute resolution clause.

Arguments on appeal

It was not disputed that the claimants were not at any stage parties to the shipbuilding contracts whether as original parties or by novation and so were never parties to the arbitration agreement contained in Article 9(g).

The claimants submitted they would come under a derived rights obligation to arbitrate their claims against the defendant only if and to the extent that they were seeking to enforce the rights assigned to them under the contracts. However, the claims in question were available to them as a matter of Chinese statute law and had nothing at all to do with the rights conferred by the Guarantee Agreements.

It followed that since they were not asserting the rights that were assigned to them by the Guarantee Agreements, there was no obligation to arbitrate the Chinese law claims, which could and should be resolved by the Chinese courts.

The defendant disagreed. It submitted that the claimants became parties to the Article 9 arbitration agreement when they served the notice of reference to arbitration. Additionally, or alternatively, the defendant contended that any dispute as to whether Article 9 excluded liability for the Chinese statutory torts on which the claimants relied had to be resolved in arbitration pursuant to Article 9(g) and the conditional benefits principle.

The Commercial Court decision

The Court stated that the dispute was as to the true meaning and effect of the exclusions that formed an essential part of the guarantee rights, the benefit of which had been assigned to the claimants. The claimants took advantage of that assignment of rights by making guarantee claims and subsequently entering into settlement agreements regarding those claims.

The rights that were assigned to the claimants were qualified by the exclusions set out in Article 9. The claimants as assignees could not take the benefit of the guarantee without also being bound by the qualifications that applied to it.

Applying the conditional benefit principle, a dispute as to the scope and effect of the exclusions should be resolved by the method agreed by the assignors and the defendant, which was arbitration in accordance with Article 9.

The only issue was whether the arbitration clause at Article 9(g) applied to such a dispute as a matter of construction. The Court found that it did. Among other considerations, the Court thought that an agreement to refer any dispute under Article 9 almost by definition would include and would have been intended by the parties to include a dispute as to whether the exclusions within Article 9 were effective to exclude a claim of the sort made by the claimants in the NMC proceedings.

The Court acknowledged that the claimants were entitled to bring their third-party claims in the NMC as an independent cause of action. However, the tribunals had asserted jurisdiction over a different issue, namely whether the exclusions contained in Article 9 provided a defence to the NMC proceedings.

Once it was accepted that as a matter of construction such a dispute came within the scope of the arbitration clause at Article 9(g), then the arbitrators had jurisdiction to determine that issue applying the conditional benefit principle.

The claimants’ appeal was, therefore, dismissed.

Comment

The decision provides a useful illustration of the way in which the conditional benefits principle and the equitable right to arbitrate apply when third parties seek to enforce derived contractual rights.