The latest instalment of the M/T Prestige: the English Court of Appeal refuses to recognise Spanish Judgment as a matter of public policy

The English Court of Appeal has handed down an important judgment refusing registration of a USD 1bn Spanish judgment under the Brussels I Regulation on the basis that an English arbitration award created an issue estoppel. However, the judgment lets Spain off the hook for the wide-ranging indemnities that had been awarded to the Club as compensation for Spain's failure to arbitrate.

This judgment covers a wide range of interesting issues. Its practical impacts are that (1) it prevents Spain from enforcing its USD 1bn Spanish Judgment in the UK against the Club because that judgment conflicts with an arbitration award which is binding and enforceable against Spain and (2) the Club is not entitled to the indemnities that had been awarded to it.

Background

As previously reported (here), on 19 November 2002, the M/T Prestige sank off the coast of Spain, causing an oil spill that polluted 2300 km of coastline in Spain, Portugal and France. The London Steam-Ship Owners' Mutual Insurance Association Limited (the Club) provided insurance for pollution-related liabilities to the owners and managers of the M/T Prestige up to a maximum of USD 1bn.

The significant damage caused by the oil spill gave rise to a dispute that has been ongoing for over two decades. On 12 December 2024, the English Court of Appeal (the Court) ([2024] EWCA Civ 1536) decided five appeals from orders made following three separate judgments rendered by Mr Justice Butcher (the Judge) ([2021] EWHC 1247 (Comm), [2023] EWHC 2473 (Comm), and [2023] EWHC 2474 (Comm)).

The five appeals fell into three categories: the Brussels Appeal, the Arbitration Appeals and the Human Rights Appeal. This blogpost addresses the first two categories in detail. In light of its decision on the Brussels Appeal, the Court addressed the Human Rights Appeal only briefly, following the Judge's decision that the Spanish judgment was not manifestly contrary to English public policy.

Brussels Appeal

Background

In January 2012, the Club started an arbitration against Spain, seeking a declaration that Spain was bound by the arbitration clause in the terms of the insurance. Spain did not participate in the arbitration and on 13 February 2013, the arbitrator, Mr Schaff, issued an award declaring that Spain was bound to arbitrate its claims against the Club (Mr Schaff's Award).

The Club sought to enforce Mr Schaff's Award under section 66 of the Arbitration Act 1996. The High Court and subsequently, the Court of Appeal, held that an order should be made in the terms of Mr Schaff's Award under section 66 of the Arbitration Act 1996 (the Section 66 Judgments).

After years of litigation in the Spanish courts, the Provincial Court in Spain issued a judgment against the Club for EUR 855,493,575.65 (approx. equivalent to the USD 1bn liability cap) on 1 March 2019 (the Spanish Judgment).

Spain successfully registered the Spanish Judgment in the UK, which the Club subsequently appealed on the basis of the exceptions in Article 34 (1) and (3) of the Brussels I Regulation, which provide as follows:

Article 34: A judgment shall not be recognised:

    1. if such recognition is manifestly contrary to public policy in the Member State in which recognition is sought;

    […]

    3. if it is irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought;

In the appeal to the registration, the Judge referred three questions to the Court of Justice of the European Union (CJEU), which in turn found that the Section 66 Judgments were not irreconcilable with the Spanish Judgment for the purposes of Article 34(3) due to (i) the insurance exception in the Brussels I Regulation and (ii) pre-existing proceedings in the Spanish courts, between the same parties in respect of the same cause of action as the arbitration before Mr Schaff, which were lis pendens. At the time, the decision of the CJEU was directly binding on the UK and the English Courts. The Brussels I Regulation has been largely superseded by the Recast Brussels Regulation and only applies to legal proceedings instituted in EU member states before 10 January 2015 (as was the case for the Spanish proceedings) and to judgments given in those proceedings. 

Having received the CJEU's ruling, the Judge decided that the Section 66 Judgments created an issue estoppel and that the CJEU's decision in relation to irreconcilability could not be binding. This was because the CJEU did not have jurisdiction to give rulings in circumstances where the national court would not be bound by its interpretation.

In addition, the Judge found that Mr Schaff's Award gave rise to a binding issue estoppel preventing registration of the Spanish judgment on English public policy grounds under Article 34(1).

Issues on appeal:

There are two parts to this first issue. First, the Judge had found that the CJEU exceeded its jurisdiction in answering questions which were not referred to it, applying the law to the facts and basing its reasoning on a misapprehension of those facts.

The Court held that while the CJEU answered the questions referred to it in an unanticipated (and perhaps unwanted) way, the Judge was bound to follow what the CJEU decided. The CJEU was entitled to answer the questions referred to it in a manner it saw fit, including by considering the impact of the insurance and lis pendens provisions in the Brussels I Regulation, notwithstanding that no questions had been referred to it in relation to those principles. Despite the fact that the CJEU drew inevitable conclusions as to the outcome based on relevant facts, the CJEU did not exceed its jurisdiction given that the operative part of its decision pertained to EU law.

Second, the Judge also considered that the Section 66 Judgments were binding as between the Club and Spain and could not be displaced by a subsequent decision of the CJEU. This was on the basis that the jurisdictional regime of the Brussels I Regulation did not apply to arbitration and was accordingly not applicable to Mr Schaff's awards.

However, the Court held that the Judge had wrongly concluded that the Section 66 Judgments would achieve primacy over any future judgment (such as the Spanish Judgment). Instead, the Court of Appeal which delivered the Section 66 Judgment had simply said that there was "a real prospect of establishing the primacy of the award over any inconsistent judgment which may be rendered in Spain" but noted that any inconsistency was hypothetical at that stage. The Court of Appeal did not decide the same issue as the CJEU. Accordingly, the Section 66 Judgments could not have created a binding issue estoppel requiring the Court to hold that they were irreconcilable with the Spanish judgment, preventing registration under Article 34(3).

The Judge had decided that the CJEU's answer to his third question had precluded him from deciding that the Section 66 Judgments created a binding issue estoppel that could prevent registration of the Spanish Judgment on the grounds of English public policy under Article 34(1). The Club appealed this argument on the basis that the Section 66 Judgments had already decided that they were irreconcilable judgments for the purpose of Article 34(3), creating a binding issue estoppel. Therefore, it would be against public policy to register the Spanish Judgment.

As set out above, the Court rejected the argument that the Section 66 Judgments had finally decided whether they were irreconcilable judgments for the purpose of Article 34(3). Therefore, the Section 66 Judgments did not create a binding issue estoppel and the exception under Article 34(1) was not triggered.

Spain argued that if Mr Schaff's award created an issue estoppel preventing registration of the Spanish Judgment, this would infringe the right to an effective remedy and be contrary to the objectives of free movement of judgments and mutual trust. However, the Court rejected this argument and held that Mr Schaff's Award created a binding issue estoppel.

The Court stressed the importance of respecting the finality of litigation and determined that it would be wrong as a matter of fundamental legal principle to allow parties to ignore arbitral decisions. The regime of the New York Convention makes it clear that it would be "wholly undesirable" as a matter of English public policy to disregard an arbitration award. Failure to recognise a binding arbitral award would "constitute a manifest breach of a rule of law regarded as essential to the legal order of the Member State" as per the Article 34(1) case law. Article 73(2) of the Recast Regulation (the successor to the Brussels I Regulation) is explicit that it does not affect the application of the New York Convention, and the Court held that that must also be the position under the Brussels I Regulation.

Arbitration Appeals

Background

In a separate English seated arbitration against Spain in 2023 before Sir Peter Gross, the Club was awarded equitable compensation for Spain's breach of its equitable obligation to arbitrate in an amount that would neutralise any damages obtained by Spain. The arbitrator declined to grant an anti-suit injunction or damages in lieu of an injunction. The Club obtained a similar award by Dame Elizabeth Gloster against France.

Spain and France challenged the awards on the basis of s67 (substantive jurisdiction), s68 (serious irregularity) and s69 (point of law) of the Arbitration Act 1996.

The Judge agreed with the arbitrators that they had the power to award equitable compensation for breach of an obligation to arbitrate, but that no anti-suit injunction or damages in lieu of an injunction could be granted in the circumstances.

Issues on appeal:

The Court agreed with the Judge that no anti-suit injunction could be granted against Spain or France. Section 48(5) of the Arbitration Act 1996 gives arbitrators the same power to grant equitable remedies such as injunctions as the court has. As such, if section 13(2)(a) of the State Immunity Act 1978 restricts the court from issuing an injunction against a state without the state's consent to the contrary, an arbitrator is equally restrained from doing so.

The Court confirmed that where states are not involved, the natural route to achieving compensation for losses suffered due to breach of the equitable obligation to arbitrate would be to grant equitable damages under section 50. But the power to issue an injunction must exist for equitable damages under section 50 to be available. In this circumstance, due to state immunity, there was no power to issue an injunction. Therefore, no equitable damages could be granted under section 50 of the Senior Courts Act 1981.

The Court concluded that as a matter of law, the arbitrators did not have the power to award the indemnities that they had granted to compensate the Club for Spain and France's failure to arbitrate the dispute.

The Court determined that the 'conditional benefit principle' is well-established as a matter of English law. This meant that Spain and France – being third parties to the insurance contract – could not take the benefit of the insurance contract upon which they claimed without accepting its burdens, which meant respecting both the arbitration and the 'pay to be paid' clauses which were contained within it. The former necessitated arbitration for any dispute relating to the P&I cover, while the latter stipulated that the Club was only liable if the owners and managers had initially paid the full extent of their liability from their own funds.

The indemnities awarded to the Club were supposedly intended to compensate the Club for past and future violations of the arbitration clause. However, the Court determined that in reality, the indemnities compensated the Club for the fact that the Spanish Supreme Court had ignored the pay to be paid clause, which disregarded the nature of the conditional benefit principle. Even if equitable compensation was available beyond section 50, it could not extend to the consequences of a breach of the pay to be paid clause, as this was not the basis upon which the Club's claim was founded. The costs incurred by the Club did not flow from the breach of the equitable obligation to arbitrate.

The Court also commented that, in the absence of an injunction, the usual remedy is damages rather than compensation. While the categories in which equitable compensation is available are not closed, it would not be appropriate to grant such relief here, particularly as the relief granted by courts in conditional benefit cases has been entirely negative or declaratory in nature. The Court also considered that since the Spanish Judgment could not be registered in England, recognition and enforcement of the Spanish Judgment in a third country should be determined by a relevant court according to its applicable law.

On that basis, the Court found that the Judge was wrong to uphold the arbitrators' awards of equitable compensation against Spain and France.

Conclusion

This is a very full decision which covers a range of issues. After delivering its judgment, the Court expressed its view that these decisions "accord with the justice of the case", because the Spanish Judgment should not be enforced against the Club in breach of the pay to be paid and arbitration clauses, and the indemnities granted by the arbitral tribunal against Spain would create extra-territorial consequences that were not justified in law or on the facts. The outcome can nevertheless not be regarded solely as a decision on its own facts given the decisions reached on the important principles considered and applied.

Importantly, the case confirms as a matter of public policy that the English courts will give primacy to its New York Convention obligations to enforce valid prior arbitration awards. The Court was clear that giving effect to a valid prior arbitral award is a matter of public policy under English law.

This decision also affirms that the English courts and English-seated tribunals have no power or jurisdiction to grant injunctive relief against states unless the state consents under the State Immunity Act 1978 or has agreed something different under section 48(1) of the English Arbitration Act.  

The Court's decision to overturn the indemnities may open the door to enforcement of the Spanish Judgment in other jurisdictions. While the Club succeeded in resisting enforcement at this stage, this may not be the last we hear about the M/T Prestige.