The need to act strategically to preserve state immunity: States lose immunity by taking steps in proceedings in the English courts to challenge a Tribunal's jurisdiction

In an appeal in a case considering the interrelation between arbitration and state immunity, on an application by France and Spain (the States), the English Court of Appeal (the Court) refused to reverse the decision of the High Court which granted permission to enforce two arbitral awards (the Awards) against the States under s66 of the English Arbitration Act 1996 (the Act). The background to the case and the decision of the High Court is described in our blog post here.

The States argued that they benefitted from immunity from the jurisdiction of the English courts under the State Immunity Act 1978 (the SIA). The Court found that in bringing an application challenging the jurisdiction of the tribunal under s67 and s72 of the Act, the States had taken steps in the proceedings other than for the sole purpose of preserving immunity. The States had been deemed to have submitted to the jurisdiction.

On a practical level, the decision demonstrates the need for states to consider carefully their strategy in responding to proceedings brought against them, if they do not wish to risk losing the general immunity granted by the SIA.

Background

The dispute is more fully described here. In summary, the Awards gave declaratory relief to the protection and indemnity insurers (the Club) of the owners of a vessel that had sunk off the coast of Spain in 2002, causing a major oil spill. The Awards declared that the States were bound by the terms in the insurance contract issued by the Club to the owners, including an arbitration clause providing for arbitration in London, and various limitations on the Club's liability.

The Club sought to enforce the Awards against the States as judgments under s66 of the Act, in the expectation that such a judgment would take primacy over any inconsistent Spanish judgment under the rules on recognition and enforcement of judgments in the Brussels Regulation. The States argued that they were immune from the jurisdiction of the English court by virtue of the SIA. The States also applied under ss67 and 72 of the Act to challenge the jurisdiction of the tribunal on the basis that they were not bound by the arbitration agreement in the Contract because: (a) the rights were Spanish law rights independent of the Contract; and (b) by their nature the claims were not arbitrable.

The States' Appeal

The High Court had rejected the States' claim to immunity, and permission to appeal was granted on two main issues: characterisation of the States' claims (the identification of the system of law by reference to which a particular issue is to be determined) and state immunity.

Characterisation

The States' first ground of appeal related to the appropriate characterisation of their rights.

In summary, the Court emphasised that characterisation was about issues (not claims), and in this case there were two issues: (a) whether the dispute had to go to arbitration; and (b) whether the limitations on the insurer's liability as contained in the Contract applied. These issues were characterised as relating to an obligation sounding in contract (rather than being an independent right arising from Spanish legislation) and would therefore be determined by English law (the governing law of the Contract).

Immunity

The majority of the judgment focused on the question of immunity. It was common ground in the proceedings that States are immune from the jurisdiction of the English courts unless they have lost their immunity pursuant to one of the exceptions set out in sections 2-11 of the SIA. The Club argued that the States had lost their immunity on three grounds:

• pursuant to section 2 of the SIA, the States had submitted to the jurisdiction of the English courts by bringing their application under sections 67 and 72 of the Arbitration Act.
• pursuant to section 9(1) of the SIA, the States had agreed in writing to submit their claims against the Club to arbitration; and
• pursuant to section 3(1)(b) of the SIA, the proceedings related to a contractual obligation of the States which fell to be performed in whole or in part in the United Kingdom.

The Court found that the States were not immune from the jurisdiction of the UK court, but its reasoning differed from that of the High Court. The Court found the principal reason for dismissing the appeal on this ground was that the States had submitted to the jurisdiction of the court, although it agreed obiter with the High Court that the States also fell within an exception to immunity under s9(1) of the SIA.

Under s2 of the SIA, a state is deemed to have submitted to the courts' jurisdiction if it has (a) instituted the proceedings; or (b) intervened or taken any step in the proceedings - unless such intervention or step is taken only for the purpose of claiming immunity. The Court considered that, until the States applied under s67 and s72 of the Act to challenge the Awards, it could not be said that any steps had been taken in the proceedings otherwise than for the purpose of claiming immunity. However, in their application, the States had positively invited the court to determine whether the arbitrator had jurisdiction (which was the principal issue raised by the Club's application). This step related to the substantive grounds for setting aside the Award, and had nothing to do with any right of the States to claim immunity. Instead of choosing to make the applications, the States could have allowed the Club's proceedings to go to default judgment, and then applied to have the judgment set aside, thereby preserving immunity. But they had not done so, and both States were therefore deemed to have submitted to the jurisdiction under s2(3)(b) of the SIA.

Whilst this was determinative of the immunity point, the Court also considered the arguments that had been made on the application of s9(1) of the SIA. The States had not signed or otherwise adopted in writing the arbitration agreement in the Contract. The key questions were whether (i) the States had consented to arbitration; and (ii) if so, whether it was sufficient to satisfy s9(1) that a state has consented to arbitration in accordance with terms recorded in writing.

On consent, the States had brought proceedings against the Club in Spain to enforce their rights under Spanish law and, for the reasons given in relation to characterisation and the scope of the arbitration agreement, the States were compelled to bring such proceedings by way of arbitration. Accordingly, for as long as the States maintained claims against the Club, they were deemed to have consented to arbitration and could not argue that they had not consented to the jurisdiction of the English courts as the courts with supervisory jurisdiction.

In relation to s9(1) of the SIA, at the time the SIA was passed, it was accepted that the reference to an arbitration agreement "in writing" did not require the agreement to be formally signed by state. Pursuit of the Spanish proceedings was sufficient to constitute an adoption by the States of the arbitration agreements, giving the Club (and the States) the right to refer the dispute to arbitration, and section 9(1) was satisfied. If it had been necessary to do so, the Court would have also confirmed that the proceedings under s66 of the Act fell within s9(1) and that the States were not immune from the jurisdiction of the court in relation to them.

Finally, in relation to section 3(1)(b) of the SIA, the question was whether the present proceedings related to an obligation which by virtue of a contract fell to be performed wholly or partly in the UK. The Court considered previous case law but noted the question was not straightforward, and ultimately declined to reach a decision on this point as it was not necessary for it to do so by reason of its decision on the other two points.

Comment

The careful consideration by the Court of the various steps which the States had taken in the proceedings – including close scrutiny of the exact terms and language used in the witness statements and submissions filed on behalf of the States – shows the degree of attention that needs to be paid by States who are both looking to preserve their strategic position in a dispute and to preserve their immunity from the jurisdiction of the English court. In bringing their application, the States were clearly concerned to bring their substantive objections to the Award to the attention of the Court. However, in so doing, they were held to have submitted to the jurisdiction of the Court and therefore lost their right to claim immunity.

Further, whilst not determinative in this case, the Court's approach to the States' arguments with respect to s9(1) of the SIA can be regarded as a sensible one. As the Court recognised, it would have been surprising if Parliament had intended s9(1) to apply only to arbitration agreements formally signed by a state. Where the State is seeking positively to enforce rights which are subject to an arbitration agreement, and these claims are denied by the respondent, there will be consent to jurisdiction in relation to proceedings relating to the arbitration, triggering the exception in s9(1).

For further information, please contact Andrew Cannon, Partner, Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.