Prestige Sinks, Arbitration Agreement Floats

The Court of Appeal’s latest decision in the M/T Prestige saga¹ reinforces the binding nature of arbitration agreements and highlights the jurisdictional challenges insurers face in international disputes involving sovereign states. The decision is particularly relevant to the shipping industry, and underscores London’s significance as a centre for maritime arbitration and insurance-related legal proceedings.

History of the M/T Prestige dispute

The case centres on the 2002 sinking of the M/T Prestige off the coast of Spain, which resulted in an oil spill causing severe pollution affecting the coastlines of Spain, France and Portugal. The vessel’s owners and managers were reinsured by the London Steam-Ship Owners’ Mutual Insurance Association (the Club).

The Club’s cover was for a maximum of US$1 billion for any one occurrence. The policy contained a ‘pay to be paid’ clause, which stipulated that the Club would only be liable if the owners and managers had first paid the full amount of their liability out of their own funds. The policy also contained an arbitration clause, which required any dispute to be referred to arbitration in London.

Spain and France sought compensation through Spanish courts, which led to a 2019 judgment against the Club for over €855 million (the Spanish judgment).

The appeals

The appeal to the Court of Appeal comprised five different appeals arising out of the case’s complex procedural history. The five appeals fall into three categories, one of which concerned human rights and is not addressed in this article.

Brussels I Appeal

The first appeal concerns the question of whether the Spanish judgment should have been registered in England. The events leading up to this question took place before Brexit. Various civil and criminal proceedings were pursued in the Spanish courts. Consequently, in 2012, the Club brought arbitration claims against Spain in London, seeking an award which would compel Spain to instead pursue the matters in London arbitration. The Club obtained an award (the Schaff award), which indeed declared that Spain was bound to arbitrate its claim against the Club. The Schaff award also confirmed that (a) payment to Spain by the owners or managers was a condition precedent to any liability of the Club and, absent such payment, the Club had no liability; and (b) in any event, the Club’s liability shall not exceed US$1 billion. Substantively the same relief was granted against France. The Club subsequently took steps to enforce the Schaff award in the Commercial Court. The Spanish judgment and the Schaff award were therefore inconsistent.

In 2019, Spain obtained an order to register the Spanish judgment under the Brussels I Regulation. The Club appealed. In 2020, Spain filed an application seeking a reference to the Court of Justice of the European Union (CJEU) on grounds of reconciling the Schaff award and the Spanish judgment; the judge agreed, and the matter was referred to the CJEU. The CJEU handed down its judgment on 20 June 2022, stating that the decision to convert the Schaff award into a court judgment could not create an irreconcilable judgment under Article 34(3) of the Brussels I Regulation, because of the insurance provisions of the same Regulation, which permit court proceedings to be brought in the jurisdiction of the insured, or where harm occurred (i.e. Spain) (the CJEU judgment).

The parties subsequently also obtained an opinion of the Advocate General (the Opinion). Advocate General’s opinions in the CJEU provide independent legal advice to the court, offering recommendations on how the court should approach the issue in question. The Opinion emphasised that the Brussels I Regulation aims to facilitate the free circulation of judgments in the EU, while respecting the autonomy of arbitration agreements. The Advocate General opined that the Spanish judgment should be recognised and enforced in England, as the Brussels I Regulation should take precedence over national arbitration laws when it comes to recognition and enforcement of judgments.

Spain then argued that the Spanish judgment should be enforced in England and Wales, relying on the CJEU judgment. The first instance judge held that the court was not bound by the CJEU judgment and therefore was not bound to enforce the Spanish judgment, because the CJEU had exceeded its jurisdiction.

Arbitration Appeals

The dispute has a complex contentious history, including inter alia criminal proceedings against the vessel’s Master, as well as arbitration proceedings in 2012 between the Club, France and Spain. In addition to the question regarding the interplay of the Brussels I Regulation and the Spanish judgment, the parties also disputed remedies awarded to the Club by subsequent arbitration proceedings.

In response to the Spanish judgment, the Club initiated arbitration proceedings in 2019, seeking declarations that an arbitrator had the jurisdiction to grant an anti-suit injunction and equitable compensation for breach of the equitable obligation to arbitrate. The arbitrations resulted in multiple arbitration awards issued separately in early 2023 by Sir Peter Gross and Dame Elizabeth Gloster. Sir Peter Gross held that Spain breached its equitable obligation to arbitrate but declined to grant injunctive relief against Spain, awarding indemnities instead. He declined to determine whether damages were available in lieu of the injunction. Dame Elizabeth Gloster granted substantially the same relief, granting an injunction restraining France from enforcing the Spanish judgment, but did not consider equitable damages (the Arbitration Awards).

The Arbitration Awards were appealed. The High Court (Mr Justice Butcher) delivered three separate judgments. The court held that while arbitrators had the jurisdiction to consider the anti-suit injunction, they could not grant such relief against sovereign states without their consent, due to the principle of sovereign immunity. Mr Justice Butcher further held that equitable compensation could only be awarded if injunctive relief was awarded in the first place; since that was not possible, equitable compensation could equally not be awarded. The Club appealed the High Court’s decision to the Court of Appeal (the Arbitration Appeals).

The Court of Appeal’s decision

The Court of Appeal highlighted that Article 34(1) of the Brussels I Regulation bars the enforcement of foreign judgments that clash with prior judgments between the same parties. Consequently, it concurred with the first instance decision of Mr Justice Butcher that the Spanish judgment could not be recognised or registered in England and Wales.

While the CJEU noted that the Schaff award and similar arbitration awards do not qualify as ‘judgments’ under Article 34(3) if they undermine the Regulation’s core objectives, such as protecting insured parties from unenforceable disputes, the Court of Appeal emphasised the necessity of finality in litigation. Ignoring arbitral decisions, which have been upheld by competent courts, contradicts fundamental legal principles. Therefore, disregarding the Schaff award would be highly undesirable as a matter of English public policy.

The Court of Appeal made three key rulings regarding the Arbitration Appeals:

Injunctions – the Court of Appeal agreed with the first instance judge that arbitrators had no power to grant injunctive relief against sovereign states like Spain or France.

Damages in lieu of injunctions – since arbitrators lacked the jurisdiction to issue injunctions against Spain and France, they also had no power to award equitable damages as a substitute for such injunctions.

Equitable compensation – the Court of Appeal disagreed with the arbitrators’ conclusion that equitable compensation could be automatically awarded in the same measure as common law damages. The indemnities given to the Club were meant to compensate for the Spanish courts ignoring the pay to be paid clause, not for the breach of the arbitration award. The Court emphasised that while equitable remedies are flexible, they must operate within the boundaries set by statutory law, especially regarding sovereign immunity.

Implications for insurers – is this the end of the saga?

This case underscores the jurisdictional hurdles insurers face in disputes, especially with the complexities of Article 34(3) of the Brussels I Regulation and the binding nature of prior judgments. Although the Brussels I Regulation is no longer applicable post-Brexit, the decision reinforces the principle that judgments can be refused on public policy grounds, and bolsters the integrity of arbitration. It serves as a reminder to parties not to bypass arbitration agreements in insurance contracts by initiating foreign proceedings.

However, the case also highlights the difficulties in enforcing arbitration clauses and awards in international disputes involving a state party. It demonstrates that arbitrators lack the jurisdiction to grant injunctions or damages in lieu of an injunction against sovereign states. This case illustrates the limits of equitable remedies, ensuring that their flexibility does not overstep the boundaries set by statutory law.

Footnotes

1. [2024] EWCA Civ 1536