Spain and France claimed against the insurer of the Prestige in the Spanish courts. The insurance contract required arbitration in London. The Supreme Court held that the states’ obligation to arbitrate was contractual. That conclusion explained why the insurer could recover damages even though an injunction against the states was unavailable.
In November 2002 the tanker Prestige, carrying 70,000 tonnes of oil, sank off the Spanish coast and polluted the Spanish and French coastlines. The London Steam-Ship Owners’ Mutual Insurance Association Ltd, a protection and indemnity club, had insured the vessel’s owners and managers. Two rules mattered. A “pay to be paid” clause made payment by the member of the insured liability a condition of any recovery from the Club. A London arbitration clause required disputes to be arbitrated in London under English law.
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The Spanish claims and the duty to arbitrate
Spain and France brought direct claims under article 117 of the Spanish Penal Code. A Spanish execution order quantified substantial liabilities, subject to the US$1 billion limit on the insurance cover.
The English proceedings had already established that the states were enforcing the insurance contract through the direct right conferred by Spanish law. English law governed the contract. The fact that the states were not its original parties did not entitle them to enforce it independently of its conditions.
Under the conditional benefit principle, a third party may choose whether to claim a contractual benefit. If it chooses to claim, it takes the associated burden. The states therefore had to pursue their insurance claims in London arbitration. Continuing the proceedings in Spain breached that obligation.
Why an injunction was unavailable
The usual response to proceedings brought in breach of an arbitration agreement is an anti-suit injunction, or damages in lieu of an injunction under section 50 of the Senior Courts Act 1981. Neither was available against the States. Section 13(2)(a) of the State Immunity Act 1978 provides that relief shall not be given against a state by way of injunction, absent written consent, which was not given. The Court of Appeal held that there was therefore also no power to award damages in lieu of an injunction. There was no appeal from that conclusion.
In separate arbitrations against Spain and France, the Club obtained awards for the costs of defending the Spanish proceedings and for sums it might have to pay under the Spanish judgment. The latter relief was conditional. If the Club became liable to make a payment, the relevant state would have to compensate it. The awards described the monetary relief as equitable compensation.
The Court of Appeal set aside the monetary awards. It treated the arbitration obligation as equitable and held that equitable compensation was unavailable. The Club appealed. The Supreme Court had to decide both how to classify the obligation and what consequence that classification had for the awards.
The duty is contractual
Lord Leggatt and Lord Burrows, with whom Lord Lloyd-Jones, Lord Doherty and Lord Snowden agreed, held that the debate rested on a false premise. Equitable compensation compensates for equitable wrongs, such as breach of trust or fiduciary duty. It is discretionary and is not the remedy for breach of contract. The question was therefore whether the duty created by the conditional benefit principle was equitable at all.
The Supreme Court held that it was not. What matters is the character of the original burden, not a separate equitable duty invented for the third party. The arbitration clause was a contractual term. Once the States chose to enforce the insurance contract, they were to be treated, for the purposes of that clause, as parties to it and placed in the same position as the contracting party — not a better one. Their breach is therefore treated as a breach of contract, for which the ordinary remedy is common law damages.
The Court traced the description of the duty as equitable to an analogy with English decisions granting anti-suit relief. The availability of an equitable remedy did not determine the nature of the underlying obligation.
Why the awards were not to be set aside
The conditional benefit principle is “defensive” only in the sense that the States owed no duty unless they chose to enforce the contract. Once they did, they could be sued for breach. There is no principled reason to allow an injunction but refuse damages, which are less coercive. The statutory bar on injunctions against a state, which exists because an injunction has an immediate coercive effect, does not bar an award of damages.
Section 50 did not impliedly remove any independent power to compensate for breaches already committed. It only supplies a wider power, including damages for a wrong that has merely been threatened. That wider power was unavailable here, so compensation could not be awarded on a purely anticipatory basis. It could still be awarded for past breaches, including by a conditional order requiring payment if and when future loss from those past breaches actually arose. The orders made were of that kind.
The Court also rejected objections based on causation and interference with enforcement abroad. Those issues fell outside the questions properly open on the statutory appeal from the awards. In any event, the Spanish proceedings had been an effective cause of loss. Requiring compensation did not prevent a foreign court from deciding whether to enforce the Spanish judgment.
Earlier litigation had not decided whether the obligation was contractual or equitable, or whether damages could be awarded. The arbitrators had already assessed the consequences of the breaches. Describing the money as equitable compensation did not require the parties to repeat that exercise.
Verdict: The Supreme Court unanimously allowed the Club’s appeal and upheld the monetary awards as common law damages. It invited the parties to agree a recital clarifying their basis and directed the removal of the word “equitable” from the relevant declarations. It declined to remit the awards to the arbitrators.
