Briefing

Prestige returns: Supreme Court confirms damages for breach of obligation to arbitrate

The UK Supreme Court has unanimously allowed a London P&I Club’s appeal in the latest round of litigation arising from the 2002 sinking of the M/T Prestige, upholding the arbitration awards.¹ The central issue in dispute was whether a monetary remedy could be awarded against a sovereign state for breach of an obligation to arbitrate arising under the conditional benefit principle, where injunctive relief was unavailable. The court held that Spain and France’s obligations to arbitrate were contractual rather than equitable, and that the tribunals could therefore award common law damages for breach of those obligations.

Background to the M/T Prestige dispute

As set out in our earlier briefing,² the dispute traces back to the sinking of the M/T Prestige off the coast of Spain in 2002, which caused extensive oil pollution along the Spanish and French coastlines and gave rise to more than two decades of litigation.

The appellant, The London Steam-Ship Owners’ Mutual Insurance Association Limited (the Club), provided P&I cover to the vessel’s owners and managers up to a US$1 billion limit. The English law policy provided for disputes to be referred to London arbitration and contained a “pay to be paid” clause, under which the Club was only liable to indemnify the owners and managers once they had discharged their liability out of their own funds.

Spain and France (the States) brought direct-action claims against the Club in the Spanish courts to recover compensation for the pollution damage. London arbitration awards and English court judgments in 2013 confirmed that the States were bound to arbitrate those claims and that the Club had no liability to them as the owners and managers had not discharged the liability out of their own funds.

The States continued to pursue compensation through the Spanish courts, culminating in a 2019 judgment (the Spanish Judgment) under which the States were declared entitled to enforce over EUR 2.4 billion against the Club, Owners and Master, with the Club’s exposure capped at the policy limit (c.EUR 855 million).

Separate London arbitration proceedings were commenced, with arbitrators holding the States in breach of their equitable obligation to arbitrate and granting the Club declaratory relief, an anti-enforcement injunction against France, and equitable compensation for costs and exposure to future enforcement of the Spanish Judgment.

At appeal, the Court of Appeal held, among other things, that an arbitral tribunal had no jurisdiction to grant injunctive relief, or damages in lieu of an injunction, against a sovereign state, and rejected the basis on which equitable compensation had been awarded.

Issues before the Supreme Court

The Supreme Court granted permission to appeal on two issues:

Whether an arbitral tribunal can award equitable compensation against a State for breach of an equitable obligation to arbitrate; and
Whether the Court of Appeal exceeded the statutory limits of an appeal under section 69 of the Arbitration Act 1996.

The issues arose in the context of the conditional benefit principle and the States’ immunity from injunctive relief under section 13(2)(a) of the State Immunity Act 1978.

The Club’s case rested on the conditional benefit principle: a third party cannot enjoy a contractual benefit without also bearing its corresponding burden, and a state’s immunity from injunctive relief does not alter that principle. Accordingly, a monetary remedy remained available for breach of the obligation to arbitrate.

The Club submitted this was consistent with existing case law and, at most, represented a principled, incremental development rather than a new departure. It further argued that by ruling out any monetary remedy, the Court of Appeal had effectively converted the States’ limited immunity into a blanket immunity from monetary consequences exceeding the limits of a section 69 appeal by deciding issues that fell outside the questions of law it had permission to consider, including causation and the States’ relative culpability.

The States’ core submission, drawing on The Jay Bola³ was that the conditional benefit principle operates defensively, restraining a third party from asserting a contractual benefit inconsistently with its burden, but does not itself give rise to a monetary claim. Accordingly, an injunction, or damages in lieu, under section 50 of the Senior Courts Act 1981, where available, is the only remedy that the authorities recognise. If equitable compensation were to be recognised, it would cut across that statutory scheme and, since the Club cannot satisfy the jurisdictional threshold for section 50 relief against an immune state, allowing equitable compensation to fill that gap would, on the States’ case, render section 50 redundant and allow claimants to bypass its conditions.

The States also submitted argued that a monetary remedy would erode privity of contract by treating direct-action claimants, with no contractual relationship with the insurer, as parties to the arbitration agreement. They distinguished the “deed of covenant” authorities relied on by the Club, such as Halsall v Brizell,⁴ as cases enforcing a payment obligation attached to a benefit actually used, rather than compensation for a breach of duty, and therefore not analogous to the obligation to arbitrate.

On the second issue, the States argued that the Court of Appeal did not exceed its section 69 jurisdiction, since its observations on causation and culpability were background commentary, rather than new findings that altered the outcome, and as comity was not a distinct “question” under s.69(3)(b), the Court of Appeal was entitled to consider it.

The Supreme Court judgment

The Supreme Court held that the question of whether equitable compensation could be awarded rested on a false premise: the obligation to arbitrate arising under the conditional benefit principle was necessarily equitable. This error mattered here because state immunity barred the injunction, and therefore any section 50 damages that could otherwise have been awarded in lieu.

Endorsing Tito v Waddell (No. 2),⁵ the Supreme Court held that what matters is not whether the conditional benefit principle operates at common law and in equity, but the character of the underlying obligation on which it operates: a third party should bear the same burden as the original contracting party.

Here, the States chose to claim the benefit of the insurance contract, so they are treated as parties to it, and their breach should be properly characterised as being a breach of contract.

The Supreme Court traced the inconsistent application of the analogy between the conditional benefit principle and equitable assignment to The Jay Bola.⁶ While the decision correctly held that a third party insurer could not enforce a contractual right without also recognising the contractual obligation to arbitrate within the same contract, it relied on a flawed analogy with equitable set-off, which wrongly characterised that obligation as equitable.

The appropriate remedy was therefore common law damages. As the common-law characterisation was first raised by the Supreme Court during the hearing, the parties were invited to make further submissions.

The Club argued that its case was stronger in contract than in equity, so the same amount should therefore be awarded regardless, while the States argued that common law damages were barred by issue estoppel, alternatively that the Club had never advanced a contractual case, or, failing those arguments, that the question of common law damages should be remitted to the arbitrators since it had never been argued.

The Supreme Court rejected all three of the States’ arguments. Issue estoppel did not arise, since the contractual character of the obligation was not previously an issue required to be decided in the proceedings. Recharacterising the remedy as damages did not alter the substance of the relief, and as to remittance, there was no possibility the arbitrators would have refused relief had the claim been framed in contract from the outset, including conditional awards for future losses flowing from breaches already committed, being relief the States did not dispute the arbitrators had jurisdiction to make. The awards were upheld, with the wording to be varied to reflect the contractual basis for the monetary relief.

The Supreme Court also rejected the Court of Appeal’s reasons for denying a monetary remedy:

Nature of the remedy: Conditional benefit remedies are not confined to injunctions or declarations; existing case law demonstrates the principle can give rise to an obligation to pay money, and a third party should not be treated differently from a contracting party. While an injunction was unavailable here, an award of common law damages is not precluded.
State immunity and section 50: Section 13(2)(a) of the State Immunity Act 1978 precludes an injunction against a state and there is no power under Senior Courts Act Section 50 to award damages in substitution. However, that does not mean no other monetary relief exists since common law damages remain available for breaches already committed, including for future losses flowing from those breaches.
Causation: The Court of Appeal’s finding that the Club’s losses were caused by the Spanish courts failure to apply the “pay to be paid” clause, not the States’ breaches of the obligation to arbitrate, exceeded the scope of a section 69 appeal, since it was not a question the arbitrators were asked to determine, or a question of law arising on appeal. The Supreme Court highlighted the importance of respecting the limitations on the right to appeal under section 69, as discussed in Sharp Corpn Ltd v Viterra BV.⁷
Comity: The Court of Appeal likewise exceeded their statutory limits under section 69 in considering international comity, which was irrelevant to whether the power to award a remedy exists. The Court of Appeal’s analogy with anti-enforcement injunctions was also held unpersuasive on the merits, since the arbitral awards do not prevent a foreign court from recognising or enforcing the Spanish Judgment.

Implications for insurers

This decision brings the Club’s long-running dispute with Spain and France to a close in the Club’s favour, providing useful guidance on the importance of correctly characterising claims from the outset and shows that the English courts have the ability to protect English insurers and their arbitration clauses from foreign claimants and judgments, even where those claimants are nation states.

Where the conditional benefit principle imposes on a third party a contractual obligation to arbitrate, the obligation is treated as contractual, with common law damages available as the appropriate monetary remedy for breach. The practical effect of the decision is that a change in the legal characterisation of the obligation and remedy does not defeat the claim or alter the outcome where the underlying award is otherwise justified.

This may have wider significance for insurers facing a counterparty, state or otherwise, that disregards an arbitration clause, particularly where claims involve direct-action claimants who sue an insurer directly under a foreign statute, rather than suing the insured. The conditional benefit principle remains the main legal tool for holding such a claimant to the policy’s arbitration clause, in a manner comparable to the Third Parties (Rights against Insurers) Act 2010.

The decision leaves undisturbed the position that an injunction and section 50 damages remain unavailable against a state by reason of state immunity; insurers facing sovereign or state-linked claimants should continue to look to a contractual damages claim as the practical remedy.

If you require guidance on any of the issues addressed in this briefing, or would like to discuss HFW’s work in this area, please do not hesitate to contact the authors.

Freya Hawken, Trainee Solicitor, assisted in the drafting of this industry briefing.

Footnotes

The Kingdom of Spain and another (Respondents) v The London Steam-Ship Owners’ Mutual Insurance Association Limited (Appellant) No 2 [2026] UKSC 36
Prestige sinks, arbitration agreement floats | HFW
Schiffahrtsgesellschaft Detlev Von Appen GmbH v Voest Alpine International GmbH (The Jay Bola) [1997] 2 Lloyd’s Rep 279
Halsall v Brizell [1957] Ch 169
Tito v Waddell (No 2) [1977] Ch 106
Schiffahrtsgesellschaft Detlev Von Appen GmbH v Voest Alpine International GmbH (The Jay Bola) [1997] 2 Lloyd’s Rep 279
Sharp Corpn Ltd v Viterra BV (formerly Glencore Agriculture BV) [2024] UKSC 14; [2024] 4 All ER 273