Recovery Advisers succeeds in landmark case representing ECA against Dubai-based trading company

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Dubai Courts uphold party autonomy and decide against subrogating an arbitration agreement.

Recovery Advisers prevailed in a landmark case representing a major Export Credit Agency (ECA) in front of the Dubai Courts. The key outcome of the case addresses two key questions; namely, the subrogation of arbitration agreements (a question that is heavily debated worldwide and inconsistently addressed), and whether the actions of the indemnified insured can prejudice the rights of the insurer.

Both questions were answered by Dubai Courts in favor of the ECA. In doing so, Dubai Courts did not bind the ECA to an arbitration agreement they have not entered, upholding the core fundamentals of arbitration, namely party autonomy. Additionally, Dubai Courts protected the insurer’s asset and recovery rights from actions (i.e. waivers and discharges issued) by the indemnified policyholder.

Case Background

  • The original creditor of the sales contract was an exporter selling products to a buyer based in Dubai, UAE. Goods sold on FOB terms were severely damaged in transit due to the carrier’s bankruptcy. The buyer (who has not purchased Goods in Transit Insurance) refused to pay for goods they did not receive as the goods were destroyed by customs.
  • Pursuing an amicable recovery strategy at first, Recovery Advisers began negotiations with the debtor to reach a settlement. The responses and deliberate prolongation of negotiation showed that the debtor did not intend to settle the outstanding debt amicably.
  • Further discussions with the debtor showed that they had a close working relationship with the exporter, and both (wrongly) believe that since the loss has been covered by the ECA, neither had any further obligations towards attempting to recover the value or paying for the lost cargo.
  • Based on this incorrect understanding, the now-indemnified policyholder issued a waiver to the debtor confirming that all payments due are received from the ECA and proceeded with discharging the debtor of all liabilities arising from the transactions in question.

Summary of key facts / points from the case

  • The original terms of the export transaction (INCOTERMS, payment terms, etc.).
  • The damage to the cargo due to the bankruptcy of the carrier.
  • The letter issued by the policyholder to discharge the liability of the debtor.

The original terms of the export transaction (INCOTERMS, payment terms, etc.).

  • The delivery terms of the goods FOB INCOTERMS©
  • The ECA accepted the claim and decided to indemnify the policyholder because they [the policyholder] fully performed their obligations as sellers.

The damage to the cargo due to the bankruptcy of the carrier. 

  • The carrier filed for bankruptcy. Accordingly, the goods were detained at various ports before eventually arriving to Dubai several months later than originally planned.
  • The goods (food) were damaged as they were not properly stored during transit and were destroyed by customs.

The letter issued by the policyholder to discharge the liability of the debtor. 

  • After being indemnified, the policyholder issued a waiver to the debtor discharging them from any liabilities arising out of the insured transactions.

Judicial Recovery Process Adopted

  1. Due to the waiver issued by the policyholder, Recovery Advisers decided file a subrogated claim against the debtor (i.e. to pursue recoveries under the name of the subrogated ECA).
  2. The debtor contested jurisdiction of Dubai Courts based on an arbitration agreement in the sales contract between policyholder and the debtor.
  3. Additionally, the debtor argued that the rights subrogated to the ECA have been discharged by the original creditor and submitted the waiver issued by the policyholder as evidence. The debtor argued that since the original creditor waived their rights and discharged their (i.e. the debtor’s) liabilities, then there were no rights to subrogate to the ECA; consequently, there is “nothing” which the ECA can demand from the debtor.
  4. The first instance court dismissed the case based on the policyholder’s waiver reasoning that the subrogated rights stem from the rights of the original creditors, and since the former was discharged, then so are the latter.
  5. Recovery Advisers appealed the decision and argued the following points:
  • After indemnification, the policyholder is no longer the rightful creditor / asset owner. Therefore, at the point of issuing the waiver the policyholder never had the rights to discharge the debtor’s liability to repay the debt. The statutory subrogation of these rights occurred the instant the ECA indemnified their policyholder, and consequently actions by the policyholder cannot dispose of assets (receivables) they no longer own. Accordingly, the waiver is of no effect whatsoever.
  • In the context of international trade, jurisdiction of arbitral tribunals stems from party autonomy. The ECA insured the credit extended pursuant to the terms of the commercial agreement concluded between the exporter (policyholder) and their client (the debtor). However, the arbitration agreement therein is a separate agreement which the ECA never executed, and therefore cannot be deemed to have consented to arbitration. Accordingly, the ECA is not bound by the arbitration agreement (to which it is neither a party nor consented) for pursuing judicial recovery of losses sustained as a result of the debtor’s wrongdoing (i.e. default on the guaranteed credit). While some statutes in other jurisdictions allow for the expansion of privity of contracts in the context of arbitration to include third parties, such expansion does not apply to this case and therefore the ECA cannot be denied the natural jurisdiction of Dubai Courts to pursue judicial recoveries from the wrongdoer (i.e. the debtor).

Important Points From the Case for Credit Insurers

  • Judicial recovery under the name of policyholders has its own perils, and is not always a smooth process
  • Actions by indemnified policyholders cannot prejudice the rights of subrogated insurers.
  • The insurer can choose not to be bound by an arbitration agreement to which they are not a party, and therefore the subrogation of such agreements can be successfully contested. This specific issue is still heavily debated globally with many inconsistencies. In this case, this verdict decisively and expressly addresses this point in favor of insurers; potentially saving significant costs during judicial recovery of subrogated claims.

For more information on this case, contact Ashraf Abdelhakam from Recovery Advisers on a.abdelhakam@recoveryadvisers.com