Subrogation in shipping disputes

The term “subrogation” refers to the right whereby a creditor may, if and when a debtor neglects to exercise a property right against a third party, thereby jeopardizing the creditor’s claim, exercise the property right in the debtor’s stead, with a view to ensuring the repayment of his claim.

Pursuant to Article 73 of the PRC Contract Law, which is the foundation of the creditor subrogation system in China, a creditor may exercise his right of subrogation only by means of a lawsuit. Pursuant to the relevant judicial interpretations, to institute a subrogation suit, the following conditions should be satisfied: (1) the creditor’s claim against the debtor must be lawful; (2) the debtor’s negligence in exercising his own matured claim must have caused damage to the creditor; (3) the debtor’s own claim must have matured; and (4) the debtor’s claim must not be personal to the debtor.

In addition to protecting the interests of creditors in general, subrogation suits have a practical and positive significance in resolving particular situations such as debts and debt chains, and in circumstances where difficulties are encountered in enforcement. In practice, subrogation suits are also quite effective in resolving international shipping disputes, particularly charter party disputes.

Yu Feng is a lawyer at LC & Co.