Mitsui v Alstom: Should insurance companies be bound by an arbitration clause stipulated by the policyholder?

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Renato Franco de Moraes
Cascione Pulino Boulos Advogados,São Paulo,Brazil
rmoraes@cascione.com.br

Tatiana Kauffmann
Cascione Pulino Boulos Advogados, São Paulo, Brazil
tkauffmann@cascione.com.br

In a recent ruling enforcing a foreign award rendered by the International Chamber of Commerce (ICC) (Proceedings No 14,930), in New York, the Brazilian Superior Court of Justice (SCJ) held that an insurer is bound by an arbitration clause executed exclusively by the insured and a third party.

Under articles 38 and 39 of the Brazilian Arbitration Law (Law No 9,307/1996), the main requirements for enforcement of a foreign arbitration award in Brazil are: (a valid arbitration clause; an award in conformity with the thresholds set out by the arbitration clause; compliance with due process of law; arbitrability of the matter in dispute; and absence of offence to the national public order, which means that the award may not violate principles and values considered fundamental in Brazilian society.

Proceedings No 14,930 concern the enforcement of a foreign award rendered in a claim initiated by Alstom against Mitsui, an insurance company that had provided coverage to Alunorte. Alstom and Alunorte had entered into an agreement in which Alstom was required to supply an industrial boiler to Alunorte, and the parties agreed to submit potential litigation to arbitration. Alunorte identified defects in the tubes of the boiler and asked Mitsui, the insurer, to redress the damages sustained. To oust a potential contribution claim, Alstom initiated arbitration proceedings against Mitsui before under the ICC Rules, seated in New York, relying on the arbitration clause set out in the contract executed with Alunorte. The tribunal ruled in Alstom’s favour.

In a 9-3 vote, the Brazilian SCJ enforced the arbitration award in Brazil. The majority opinion held that the analysis as to whether Mitsui is subject to arbitration would be outside the limits of the enforcement proceedings since this matter would concern the merits of the foreign award. Some of the opinions acknowledged that the extension of the arbitration clause could be analysed by the SCJ, but stressed that Mitsui was bound by the arbitration clause since it had received all Alunorte’s contractual rights as a result of the subrogation originated by the payment of damages.

The Brazilian SCJ’s award has at least two flaws, namely: (1) it mistakenly addresses the extension of the arbitration clause to non-signatory parties as part of the merits of the dispute; and (2) it adopts a misconceived notion of subrogation, assuming that it implies in the transference of all the contractual regime, and not only of the credit initially held by the insured.

The reasoning of the majority opinion held that the extension of the arbitration clause to third parties is excluded from the scope of the enforcement proceedings. This matter would be part of the merits of the dispute, and its analysis by the SCJ would necessarily lead to the reexamination of the controversy already determined by the arbitral tribunal, held the majority.

Contrary to the majority opinion of the SCJ, the question as to whether a party is subject to arbitration is separate from the merits of the case. Rather, it is directly related to the withdrawal of the constitutional rights to access the Judiciary and to the due process of law (article 5, XXXV and LIV of the Brazilian Constitution). By unlawfully submitting a non-signatory party to arbitration, the foreign award may violate the Brazilian Constitution, and should not be ratified accordingly, on this argument.

The majority’s reasoning is also inconsistent with the legal regime of subrogation in Brazilian law. Where an individual or a company compensates damages sustained by another, it receives the right of the injured to seek redress against the tortfeasor, by means of subrogation. The scope of the transference includes solely the right to obtain pecuniary compensation, and not the entirety of the contractual regime to which the injured party was submitted. Under article 786 of the Brazilian Civil Code, the insurance company is subrogated only to the rights and claims of the insured. By contrast, obligations are not transferred by subrogation and do not bind the insurance company to any sort of duties.

This is particularly relevant concerning the arbitration clause, which is considered an autonomous agreement. The arbitration clause is a specific agreement within the contract, and the rights arising from it must be assessed apart from those originated from the main contract. In the light of such autonomy, and considering that subrogation transfers only the credit, it is an error to assume that the effects of subrogation is that the insurer also becomes bound by the arbitration clause.

The underlying rationale of the concept of subrogation is to grant the party who pays awards an alternative source of redress for its loss and, concurrently, to prevent the wrongdoer from being unjustly enriched. To expand the application of the arbitration clause in the situation involving the insurance company is inconsistent with this concept, since the company who should solely be benefited also carries the burden of being compelled to submit to arbitration.

On the other hand, arbitration is an alternative method of dispute resolution that relies on voluntary consent of the parties. Parties may only withdraw from their constitutional right to seek the Judiciary upon unequivocal will to use arbitration as a mean to adjudicate potential litigation. Judicial and arbitration courts are reluctant in submitting non-signatory parties to arbitration and require evidence at least of implied consent to oust the judicial analysis of the case.

Under this scenario, the use of subrogation as grounds to impose arbitration seems altogether mistaken. Mitsui has never agreed to the arbitration clause and there is no evidence of implied consent in the case. The fact that the insurance company provided coverage to the defective boiler does not mean that it knew – or should have known – all the details and subtleties of the contract executed by Alstom and Alunorte.

The Brazilian SCJ erred in concluding that assessing these factors would be an undue interference in the merits of the arbitration award. The requirements for enforcement encompass the analysis as to the submission of the non-signatory party to arbitration. The effect of subrogration is directly relevant to that issue, and should not have been avoided. It is of utmost importance that the SCJ reevaluates the matter, preventing the Mitsui case from becoming an undesirable precedent for similar situations.

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