Extension of the Arbitration Agreement to the Insurer in terms of Subrogation

July 2018 Duygu Öner Ayçiçek
% 0

Introduction

Arbitration agreements that constitute an exception to the State adjudication are, in principle, valid and binding between parties which conclude arbitration agreements. That being said, in certain cases, the extension of the arbitration agreement to the non-signatory third parties comes to the fore. The extension of the arbitration agreement to the insurer within the scope of the subrogation is one exception.

The Relativity of the Debtor-Creditor Relationship

The debtor-creditor relationship signifies the legal connection between the debtor and creditor, which assures the performance of a certain obligation. In principle, the debtor-creditor relationship is effective and results only between the parties of this relationship. The fact that this relationship results only between the parties is called “the relativity of the debtor-creditor relationship” in the doctrine[1].

According to the principle of relativity, arbitration agreements are binding and valid only for the related parties, as well. In principle, it is not possible for persons who are not a party to the arbitration clause to participate in the arbitral proceedings as a party, or to hinge upon the arbitration clause under the contract. Although this is the general principle, there are certain exceptions to this rule. These exceptions appear to be the extension of the arbitration agreement to non-signatory third parties.

The extension of the arbitration agreement to third parties can be described as an extension of the scope of the arbitration agreement so as to include third parties who are not parties to this agreement, and that these persons’ participation in the adjudication as claimant or respondent[2]. On the one hand, inclusion of third parties in the lawsuit through an extension in certain cases is considered to be fair but, on the other hand, the doctrine considers that an extension is an issue to which arbitrators and courts approach cautiously[3].

Subrogation of the Insurer

One of the cases in which an arbitration agreement is extended to third parties is through subrogation. Subrogation is generally defined as the replacement of someone by another, as are the inheritance of one’s rights by another. The subrogation of the insurer is the legal transfer of the receivable for compensation, considering the amount of the paid insurance indemnity that the insured is entitled to against a third party, for any legal reason for damages that arise upon realization of the risk, to the insurer[4].

Under Turkish Law, subrogation of the insurer is stipulated under Article 1472 of the Turkish Commercial Code. Pursuant to the said provision, the insurer shall succeed the insured upon payment of the insurance indemnity that derives from the realization of the risk within the scope of the insurance. If the insured has the right to sue third parties who are liable for the loss incurred, this right shall pass to the insurer up to the amount it has paid. In this regard, the subject of the succession is the right to claim that the insured is entitled against the third party. This right of the insured against the third party shall be transferred to the insurer upon the payment of the insurance indemnity, and taking into consideration the proportion of the amount paid. For this reason, the subrogation of the insurer is characterized as a legal assignment[5].

The Situation under Turkish Law

The extension of the arbitration agreement to the insurer becomes an issue when there is an arbitration clause in the contract between the insured and the person who has caused the damages. In this case, it is necessary to determine whether the insurer may lean upon the arbitration agreement concluded between the insured and the person who caused the damages, and whether the person who caused the damages is obliged to apply to arbitration with the insurer[6].

The issue with regard to the extension of the arbitration agreement to the insurer often comes to the fore in disputes arising from carriage contracts due to damage of the insured goods. In this regard, the Court of Cassation assesses the issue as to the extension of the arbitration agreement to the insurer in many decisions, while considering the extension of the arbitration agreement in the carriage contract and bill of lading to the consignee.

It is held in one of the decisions of the General Assembly of the Civil Chambers of the Court of Cassation (“GACC”) regarding this issue that the arbitration clause in the bill of lading between the insured and the damaging party shall be extended to the insurer due to the principle of subrogation[7]. The dispute derived from goods that were damaged during sea carriage. In this regard, the insurance company that made payment to the insured regarding the damages that occurred to the goods, filed a lawsuit against the carrier regarding damages; whereas, the carrier requested the court to reject the claim based on the arbitration clause under the carriage agreement concluded between the shipper and the carrier. The GACC, firstly, elaborated upon whether the arbitration clause in the bill of lading shall be extended to the third party consignee within the scope of the carriage relationship. Within this scope, the GACC held that the bill of lading shall be taken into account in the legal relationships between the carrier and the consignee, that the bill of lading referred to the arbitration agreement in the carriage agreement, and that the consignee was bound by the terms of the bill of lading by way of submitting the bill of lading through endorsement, and upon taking delivery of the load. Therefore, the GACC found that the consignee was bound by the arbitration clause, and that the arbitration clause bound the insurance company as the successor of the consignee.

In another dispute of damaged goods during sea carriage, the 11th Civil Chamber of the Court of Cassation held that the arbitration clause in the bill of lading, as stipulated by the carrier, was binding upon the consignee, and that it was binding upon the insurer of the consignee due to the principle of succession[8].

In a case that was subject to a decision dated 2017[9] of the 11th Civil Chamber of the Court of Cassation, a lawsuit was filed against the insurer that had become the successor of the rights of the recipient company by paying the insurance indemnity to the latter, with the general average receivable claim regarding the carriage of goods subject to the freight contract. The First Instance Court held that the provisions of the bill of lading between the carrier and the consignee shall be taken into account, and that the arbitration agreement in the bill of lading was valid for the general average, as well. The Court held that the respondent insurer replaced the insured due to succession by way of making a payment within the scope of the policy. In this regard, the Court accepted the jurisdictional objection considering arbitration, and rejected the claim based on lack of jurisdiction. The said decision was upheld by the 11th Civil Chamber of the Court of Cassation.

In another lawsuit filed against the carrier by the insurer that compensates the loss of its insured with regard to damaged goods during carriage, an elaboration with regard to the content of the arbitration clause was made before the question of the extension of the arbitration clause to the insurer was discussed. In the related dispute, the defendant carrier party propounded on the arbitration clause in the bill of lading, and submitted a jurisdictional objection considering arbitration. The Court found that there was no clear, definite or unfaltering arbitration clause in the bill of lading, and that there was no reference to an explicit and definite date to the charter-party. Thus, the Court held that the jurisdictional objection could not be accepted, and the related part of the decision was approved by the Court of Cassation[10].

The above-mentioned jurisprudence of the Court of Cassation considered the arbitration clause to be valid between the insured and damaging party, to be within the scope of the succession, and that it binds the insurer[11].

Although the Court of Cassation decisions render that the insurer is bound by the arbitration clause in the carriage agreement due to principle of subrogation, it is criticized in the doctrine that the issue as to whether the insurer has the intention to elect arbitration with the damaging party, or whether the damaging party intends to elect arbitration with the insurer was not thoroughly examined. According to this view, the will to apply arbitration between the parties must explicitly and without hesitation be revealed by the parties. In the absence of such will, it is expressed that the extension of the arbitration agreement to the insurer is not possible only due to the principle of subrogation[12].

Conclusion

According to the principle of subrogation, the rights of the insured against the third party shall be transferred to the insurer through the payment of the insurance indemnity, and by taking into consideration the proportion of the payment. In the event that there is an arbitration agreement between the contractual relationship between the insured and the damaging party, the issue as to whether the said arbitration agreement shall be valid and binding for the insurer comes to the fore. In the doctrine, although it is criticized that the existence of the will for arbitration is not examined, the Court of Cassation elaborates in many of its decisions, the arbitration clause that is valid between the insurer and the damaging party within the scope of the subrogation, and holds that the arbitration clause shall be valid and binding for the insurer.

[1] Oğuzman, Kemal / Öz, Turgut, Borçlar Hukuku Genel Hükümler, Istanbul, 2000, p.23.

[2] Köşgeroğlu, Şit, Banu, Yabancı Hakem Kararlarının Üçüncü Kişilere Karşı Teşmili, Gazi Üniversitesi Hukuk Fakültesi Dergisi C. XV, Y. 2011, Sa. 3, p.5.

[3] Esen, Emre, Uluslararası Ticari Tahkimde Tahkim Anlaşmasının Üçüncü Kişilere Teşmili, İstanbul, 2008, p. 85 vd.; Köşgeroğlu, p. 6.

[4] Omağ, Merih Kemal, Türk Hukukunda Sigortacının Kanuni Halefiyeti, Istanbul 2001, p. 35.

[5] Omağ, p.66.

[6] Esen, p. 195.

[7] Decision of the General Assembly of the Civil Chambers of the Court of Cassation numbered 1994/11-765 E., 1995/39 K., dated 1.2.1995.

[8] Decision of the 11th Civil Chamber of the Court of Cassation numbered 2004/189 E., 2004/ 9234 K. dated 04.10.2004. Similarly, decision of the 11th Civil Chamber of the Court of Cassation numbered 2016/8058 E., dated 26.09.2016; decision of the 11th Civil Chamber of the Court of Cassation numbered 2015/12971 E. 2017/240 K., dated 12.01.2017.

[9] Decision of the 11th Civil Chamber of the Court of Cassation numbered 2016/3454 E. 2017/7240 K., dated 13.12.2017.

[10] Decision of the 11th Civil Chamber of the Court of Cassation numbered 2013/15039 E. 2014/17925 K. dated 19.11.2014.

[11] Esen, s. 198.

[12] Esen, s. 201-202.

All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.

Other Contents

The ICC Guide on Effective Conflict Management
Newsletter Articles
The ICC Guide on Effective Conflict Management

The ICC Commission on Arbitration and ADR (“Commission”) published a new guide and report with the aim to increase awareness on alternative dispute resolution (“ADR”) mechanisms to prevent disputes and strengthen the relationship between all stakeholders.The Guide on Effective Conflict Management...

Arbitration 30.06.2023
M&A Arbitration
Newsletter Articles
M&A Arbitration

Mergers and Acquisitions (“M&A”) are restructuring of companies or assets through various types of financial transactions, such as mergers, acquisitions, purchase of assets, or management acquisitions. This Newsletter article covers M&A disputes being solved before arbitral tribunals.

Arbitration 28.02.2023
The Principle of Revision au Fond in Arbitration
Newsletter Articles
The Principle of Revision au Fond in Arbitration

In the context of arbitration practice, the principle of revision au fond means that the courts can not examine the merits of a dispute when reviewing an arbitral award. This principle is most commonly encountered in set aside and enforcement proceedings. An arbitral award is evidence of the parties’ willingness...

Arbitration 30.11.2022
Decision of the Court of Cassation General Assembly Allowing Bankruptcy Proceedings Before Turkish Courts Despite the Existence of an Arbitration Agreement
Newsletter Articles
Decision of the Court of Cassation General Assembly Allowing Bankruptcy Proceedings Before Turkish Courts Despite the Existence of an Arbitration Agreement

Under Turkish law, parties may agree on the settlement of disputes that have arisen or may arise, regarding the rights that they can freely dispose of, by arbitration. However, disputes which are not subject to the will of parties, such as the disputes relating to in rem rights of immovables, bankruptcy law...

Arbitration 30.06.2022
ICCA General Report on the Right to a Physical Hearing in International Arbitration
Newsletter Articles
ICCA General Report on the Right to a Physical Hearing in International Arbitration

On 4 September 2020, a research project “Does a Right to a Physical Hearing Exist in International Arbitration?” was launched by an International Council for Commercial Arbitration (“ICCA”) taskforce. Due to the Covid-19 pandemic, many arbitration hearings were held online. Many institutional rules...

Arbitration May 2022
2022 DIAC Arbitration Rules
Newsletter Articles
2022 DIAC Arbitration Rules

Dubai International Arbitration Center amended its Arbitration Rules on 25 February 2022. The 2022 Arbitration Rules were published on 2 March 2022 and came into effect on 21 March 2022. The Rules will be applied to arbitrations that are filed after 21 March 2022; unless parties agree otherwise...

Arbitration May 2022
European Courts’ Diverging Approach over Intra-EU Investment Arbitrations
Newsletter Articles
European Courts’ Diverging Approach over Intra-EU Investment Arbitrations

In the aftermath of the Achmea decision, controversies on intra-EU arbitrations continue. Most recently, the Paris Court of Appeal has annulled two arbitral awards rendered against Poland. Meanwhile, the Higher Regional Court of Berlin has refused to declare that an Irish investor’s ICSID claim...

Arbitration May 2022
Decision of the Regional Court of Appeal Stating that Misinterpretation of Law Provisions in Arbitration Proceedings Does Not Contrary to Public Order
Newsletter Articles
Decision of the Regional Court of Appeal Stating that Misinterpretation of Law Provisions in Arbitration Proceedings Does Not Contrary to Public Order

Under Turkish law, the legal remedy that can be applied against arbitral awards is an annulment action. Law on International Arbitration No. 4686 (“IAL”) finds its application area in arbitration proceedings where Turkey is the place of arbitration...

Arbitration February 2022
The Landesbank Decision
Newsletter Articles
The Landesbank Decision

It is well known that following a decision of the Court of Justice of the European Union, problems arose related to arbitration of intra-EU disputes, and particularly arbitration under the Energy Charter Treaty...

Arbitration January 2022
Arbitration of Corporate Law Disputes: The Swiss Example, Lessons to be Learnt and Suggestions
Newsletter Articles
Arbitration of Corporate Law Disputes: The Swiss Example, Lessons to be Learnt and Suggestions

Arbitration in corporate law contains controversial elements in many respects, especially the issue of arbitrability. Even in legal systems where these disputes are considered to be arbitrable, uncertainties remain on whether an arbitration clause can be included in the articles of...

Arbitration December 2021
Komstroy Decision: End of an Era for Intra - EU ECT Arbitration or Not?
Newsletter Articles
UNCITRAL Expedited Arbitration Rules
Newsletter Articles
UNCITRAL Expedited Arbitration Rules
Arbitration August 2021
Dispute Resolution in the Digital Age
Newsletter Articles
Dispute Resolution in the Digital Age

Arbitration has benifited from a great increase in the use of technology which has directly effected the conduct of proceedings. More particularly, with digitalization, the way that we conduct arbitration proceedings has been changed to reflect the current needs of parties, with an aim of increasing time...

Arbitration July 2021
Public Policy as Grounds for Refusal of Recognition
Newsletter Articles
IBA Rules on Taking of Evidence in International Arbitration 2020
Newsletter Articles
French Courts Denied Exequatur to a Turkish Judgment
Newsletter Articles
Halliburton Decision on Apparent Bias: Violation without Consequences
Newsletter Articles
Enka v Chubb: Law Applicable to the Arbitration Agreement
Newsletter Articles
Voluntary Document Production in Arbitration: Civil-Law Approach
Newsletter Articles
2021 ICC Arbitration Rules
Newsletter Articles
2021 ICC Arbitration Rules
Arbitration November 2020
A Tale of Two Proceedings: Arbitration and Insolvency
Newsletter Articles
Revisions of the Swiss International Arbitration Law
Newsletter Articles
LCIA Rules 2020
Newsletter Articles
LCIA Rules 2020
Arbitration August 2020
ICSID Sets New Ethical Standards for Adjudicators
Newsletter Articles
Blockchain, Smart Contracts and Arbitration
Newsletter Articles
Impact of COVID -19 on Arbitration
Newsletter Articles
Impact of COVID -19 on Arbitration
Arbitration April 2020
Review of Arbitration Agreement in Mandatory Mediation Procedures
Newsletter Articles
ICC Report on Emergency Arbitrator Proceedings
Newsletter Articles
Action for Annulment of Objection before Arbitration
Newsletter Articles
Costs and Late Payment of Advance of Cost in CAS Arbitration
Newsletter Articles
Arbitration in Construction Industry
Newsletter Articles
Arbitration in Construction Industry
Arbitration October 2019
Basketball Arbitral Tribunal
Newsletter Articles
Basketball Arbitral Tribunal
Arbitration August 2019
Complex Arbitrations: An Overall View of the ICC Rules - III
Newsletter Articles
Complex Arbitrations: An Overall View of the ICC Rules - II
Newsletter Articles
Witness Conferencing in International Arbitration
Newsletter Articles
Arbitrability of Corporate Law Disputes
Newsletter Articles
Complex Arbitrations: An Overall View of the ICC Rules - I
Newsletter Articles
A Shift from Arbitration to Multilateral Investment Court System at EU
Newsletter Articles
Annulment of the Court of Arbitration for Sport Awards
Newsletter Articles
ICC Updates Guidance Note to Parties and Arbitral Tribunals
Newsletter Articles
Impact of the Achmea Judgment on Investment Arbitration
Newsletter Articles
The Prague Rules on the Taking of Evidence in Arbitration
Newsletter Articles
Diversity in International Arbitration
Newsletter Articles
60 Years of the New York Convention
Newsletter Articles
60 Years of the New York Convention
Arbitration June 2018
Amendment of ICSID Rules and Regulations
Newsletter Articles
Challenging Arbitrators and LCIA Challenge Decisions
Newsletter Articles
Cost Allocation in International Arbitration
Newsletter Articles
Current Issues in Expedited Procedures in Arbitration
Newsletter Articles
Umbrella Clauses in Investment Arbitration
Newsletter Articles
Costs and Reduction of Costs in Arbitration
Newsletter Articles
Moral Damages Claim in Investment Arbitration
Newsletter Articles
Expert Witnesses in International Commercial Arbitration
Newsletter Articles
Soft Law in International Arbitration
Newsletter Articles
Soft Law in International Arbitration
Arbitration December 2016
ICC Rules on Expedited Procedure
Newsletter Articles
ICC Rules on Expedited Procedure
Arbitration October 2016
The Recent Philip Morris V. Uruguay Decision
Newsletter Articles
Third Party Funders in Arbitration
Newsletter Articles
Third Party Funders in Arbitration
Arbitration September 2015
Confidentiality in Arbitration
Newsletter Articles
Confidentiality in Arbitration
Arbitration April 2015
Drafting Arbitration Agreements
Newsletter Articles
Drafting Arbitration Agreements
Arbitration July 2015
Istanbul Arbitration Center
Newsletter Articles
Istanbul Arbitration Center
Arbitration July 2014

For creative legal solutions, please contact us.