English High Court considers: arbitability of civil claims with a criminal aspect; its discretion to enforce awards under s66 of the Arbitration Act 1996; and the scope of the arbitration exception to immunity under s9 of the State Immunity Act 1978

In The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and the French State [2013] EWHC 3188 (Comm), the High Court had to consider whether to exercise its discretion under section 66 of the English Arbitration Act 1996 (the Act) to permit enforcement of two arbitral awards giving declaratory relief to the protection and indemnity insurers (the Club) of the owners of a vessel that had sunk off the coast of Spain, causing a major oil spill. The arbitral awards made declarations limiting the liability of the Club in relation to claims brought by the Spanish and French States (the States) as a result of the oil spill. The application was made by the Club on an urgent basis, as it understood that a Spanish court would soon issue a judgment in respect of the same cause of action.

The States challenged the substantive jurisdiction of the tribunal that had rendered the two awards (the Tribunal) on the grounds that their rights of direct action against the Club were in essence independent rights under Spanish law, the claims were not arbitrable and (in relation to France’s claims only) waiver of the right to arbitrate by the Club. However, the Court dismissed all of the challenges, emphasising that the States’ claims were in substance claims under a contract of insurance between the Club and the owners of the vessel (the Contract) and that they fell within the scope of the arbitration clause in the Contract.

The States’ further contention that the English courts lacked jurisdiction over them in view of their state immunity under the English State Immunity Act 1978 (the SIA) was rejected by the Court. In bringing claims in relation to the Contract, the States had, for the purposes of the Act and the SIA, become parties to the Contract and the agreement in writing in the Contract to refer claims to arbitration. The States therefore came within one of the exceptions to state immunity in the SIA.

The Court held that the real prospect of establishing the primacy of the awards of the Tribunal over any inconsistent judgment which might be rendered in Spain meant that there was clear utility in granting the Club leave to enforce the awards as judgments under section 66 of the Act. It rejected the States’ arguments that exercise of its discretion to permit enforcement would be inappropriate as it would lead to a result not countenanced by EC Regulation No 44/2001 (the Brussels Regulation) or that the awards should not be enforced because of the importance of, and public interest in, the Spanish proceedings. The Court granted leave to enforce the awards as judgments of the Court to the same effect.

Background

On 19 November 2002, the oil tanker MT “PRESTIGE” broke in two and sank in waters off the coast of North-West Spain. The resultant major oil spill caused severe pollution in the surrounding areas. In the same year, Spanish criminal proceedings were instituted against various individuals connected with the disaster. Subsequently, in 2010, civil claims were brought by the States against the owners of the tanker on the basis of their vicarious liability and also against the Club, the owners’ protection and indemnity insurers.

The civil claims against the Club were brought under two pieces of Spanish legislation:

  • the Penal Code 1995 (the Penal Code);
  • the Convention on Civil Liability (the CLC).

At the time of the High Court’s decision in this case, the total value of the civil claims stood at approximately 4.3 billion Euros.

The Club did not dispute its liability under the CLC, which was capped at a little under 23 million Euros.

Regarding the non-CLC claims, however, the Club argued that the States were bound by the terms of the Contract to bring those claims in arbitration seated in London, the substantive law of which would be English law, as stipulated by the Contract.

Accordingly, the Club played no part in the Spanish proceedings. Instead, it commenced arbitral proceedings in London and earlier this year was successful in obtaining declaratory relief in the form of two awards to the effect that:

  • the States were bound by the arbitration clause in the Contract to refer the civil claims to arbitration;
  • a condition precedent to the Club’s liability to pay the States under the Contract was payment by the insured member (i.e. the tanker’s owners) of the full amount of the insured liability. Failing payment, the Club was not liable to the States;
  • the Club’s total liability was capped at US$ 1 billion, as provided in the Contract.

The Club sought the Court’s permission to enforce the awards as judgments (or have judgments entered in their terms) pursuant to section 66 of the Act. Section 66 gives the court discretion to permit such enforcement. The reason for seeking to enforce the awards as English judgments was the expectation that the judgments would take primacy over any inconsistent Spanish judgment under the Brussels Regulation. A Spanish judgment was anticipated in November 2013.

The States resisted the Club’s application under section 66 and made their own applications pursuant to sections 67 and 72 of the Act to challenge the substantive jurisdiction of the tribunal in the London proceedings on the grounds that they were not bound by the arbitration agreement in the Contract as:

  • their rights of direct action against the Club were not contractual rights but independent rights under Spanish law;
  • their claims were non-arbitrable as they depended on a finding of criminal liability in relation to the MT “PRESTIGE” disaster;
  • in relation to France’s claims, the Club had waived its right to arbitration by participating in French proceedings.

The Court identified the following five issues to be determined:

  • How should the States’ claims be properly characterised? Were they contractual in nature or rights independent of the Contract?
  • Were the States’ claims arbitrable or did the criminal aspect of the case make them unsuitable for arbitration?
  • Had there been a waiver of the right to arbitrate the claims brought by France?
  • Did the Court lack jurisdiction over the States on the ground of state immunity?
  • If the Court did have jurisdiction, should it nevertheless decline to exercise its discretion under section 66 of the Act to permit enforcement of the awards of the Tribunal?

The characterisation of the States’ claims

The States argued that the Tribunal lacked jurisdiction on the ground that the States’ claims were not within the scope of the arbitration clause in the Contract.

A key question for the Court was therefore whether the States’ claims should be properly characterised as:

  • claims by third parties seeking to enforce a contractual obligation derived from the Contract; or
  • claims by third parties advancing an independent right of recovery under the relevant statute.

If the former, then, applying the decision of the Court of Appeal in Through Transport Mutual Insurance Assocaition (Eurasisa) Ltd v New India Insurance Co (The Hari Bhum) (No 1) [2005] 1 Lloyd’s Rep. 67 (CA), the claims would be within the scope of the arbitration clause in the Contract; if the latter, then the Tribunal would lack jurisdiction in relation to the claims.

The Court held that the question was a question of the substance of the claims. Answering this question of substance involved consideration of Spanish law but could be achieved by the English courts applying English conflict of laws principles.

The Court concluded on the basis of expert evidence that, from a Spanish law perspective, the general rule and starting point in relation to the substance of such claims was that a third party could only claim against an insurer if and to the extent that the insured party would also have been able to claim against the insurer. The Court found that the States’ right of direct action against the Club was independent of the Contract in origin but that its content, which was closely connected with the substance of the right, was provided by the Contract. It was therefore not an independent right. Although there were some exceptions under Spanish law to the general rule which allowed a third party to bring claims in certain circumstances where the insured party could not, the exceptions did not go so far as to change the essential nature of the right to bring the claims, which was contractual.

Accordingly, the Court dismissed the States’ challenge to the jurisdiction of the Tribunal on the basis of the characterisation of the States’ claims.

The arbitrability of the States’ claims

The States further submitted that the claims were not arbitrable because they were brought under the Penal Code, a criminal statute, arose out of criminal proceedings and were bound up with issues of criminal liability. Further or in the alternative, the States argued that the claims were not arbitrable because the States were acting to fulfil the constitutional, public policy function of protecting the environment.

The Court noted that the key consideration in this regard was whether reference to arbitration of a matter such as the States’ claims was prohibited either as a matter of English statute or English public policy. The distinction between, on the one hand, determinations of criminal liability and, on the other, determinations of issues which might involve criminal liability was emphasised. The latter were frequently the subject matter of arbitration, a good example of this being cases involving allegations of fraud.

The Court held that the States’ right to recover from the Club depended on proof of an insured liability under the Contract rather than a finding of criminal liability. Even if a finding of such liability were required, it would not involve criminal responsibility or criminal penal consequences but would merely be a step towards establishing a civil monetary claim against the Club. The Court also noted that a consequence of holding the States’ claims to be inarbitrable would be that civil claims advanced in criminal proceedings (as had occurred in the Spanish proceedings) were inarbitrable, whereas had the same claims been advanced in civil proceedings they would not have been. This would have the effect of making the arbitrability of such claims dependent on the claimant’s choice of proceedings.

The Court therefore held that the claims were suitable for resolution by arbitration and dismissed the States’ challenge to the jurisdiction of the Tribunal on the ground that the claims were inarbitrable.

Had there been a waiver of the right to arbitrate in respect of France’s claims?

In addition to the challenges discussed above, France lodged a separate attack on the jurisdiction of the Tribunal. It was France’s case that the Club had submitted to the jurisdiction of the French courts in civil proceedings commenced by France in relation to the MT “PRESTIGE” disaster and therefore had waived the right to rely on the arbitration clause in the Contract. The Court had to consider whether there had been a waiver as a matter of French law and, if so, whether that amounted to a waiver as a matter of English law, which was the proper law of the agreement to arbitrate in the Contract and the law of the forum.

The Court found that the only claims made against the Club in the French proceedings were claims under the CLC, which in fact were no longer disputed by the Club. The non-CLC claims were not in issue in the French proceedings and so the issue of waiver of the right to arbitrate non-CLC claims, which were the subject matter of the London arbitration proceedings and the English court proceedings, did not arise. The Court added that it was in any event not objectively clear that, at the time of the Club’s participation in the French proceedings, the Club was being presented with two alternative and inconsistent options (i.e. continuing with the French proceedings or arbitrating the States’ claims) and so there could have been no waiver as a matter of English law.

Accordingly, France’s separate challenge to the jurisdiction of the Tribunal failed.

Did the Court have jurisdiction in view of the States’ claims to state immunity?

Although the States’ challenges to the substantive jurisdiction of the Tribunal all failed, the States raised a further argument before the Court that they had immunity from the jurisdiction of the English courts under the SIA. Such immunity would mean that the Court was unable to grant the Club leave to enforce the Tribunal’s awards against the States.

Under section 1(1) of the SIA, a state is immune from the jurisdiction of the English courts, subject to any exceptions to immunity provided for in the subsequent provisions of the SIA. The States therefore had prima facie immunity under the SIA, subject to any applicable exceptions.

The Club argued that the States had lost their immunity on three principal grounds:

  • pursuant to section 9(1) of the SIA, the States had agreed in writing to submit their claims against the Club to arbitration;
  • 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 obligation cited by the Club was the obligation to arbitrate claims under the Contract in London;
  • the States had submitted to the jurisdiction of the English courts in relation to the Club’s application under section 66 of the Act and were therefore not immune in respect of that application. The Club also contended that immunity had been lost in respect of the States’ own applications under sections 67 and 72 of the Act, as these applications had been instituted by the States.

In relation to the Club’s first ground, the Court referred to the analysis of the High Court in the Through Transport case referenced above. The High Court’s analysis concluded that a third party who brings a claim under an insurance contract containing an arbitration clause becomes a party to the arbitration agreement for the purposes of the Act. Accordingly, when the claim is disputed, the third party is bound to refer the dispute to arbitration in accordance with the arbitration clause in the contract. In this respect, the States were therefore to be regarded as parties to the agreement to arbitrate in the Contract.

The question remained whether the States had agreed in writing to submit their claims against the Club to arbitration within the meaning of section 9(1) of the SIA. The Court was satisfied that the conclusion that the States were parties to the written arbitration agreement in the Contract for the purposes of the Act was sufficient also for the purposes of the SIA. The reasons given by the Court were as follows:

  • it would be surprising if the requirements of the SIA and the Act, both of which were English statutes, were different. Section 9 of the SIA addressed arbitration and the English law of arbitration was set out in the Act;
  • the purpose of section 9 of the SIA was to ensure that, where a state was bound to arbitrate a dispute, it was also bound to submit to the supervisory jurisdiction of the courts. This was necessary for the arbitration to be effective. The requirements of the SIA and the Act regarding an agreement in writing ought, therefore, to be the same;
  • there was nothing in the Act to suggest that a state should be treated differently from a private party or that a state was not to be treated as having entered into an agreement in writing where a private party would be so treated;
  • the two main authorities on section 9 of the SIA, although factually distinguishable, gave some support to the Club’s case. The first authority supported the contention that the SIA did not impose additional requirements in relation to agreements in writing than were applicable under the Act. The second authority indicated that in order to ascertain whether there was an agreement in writing for the purposes of the SIA, the English courts should look to the governing law of the arbitration agreement, which in this case was English law and specifically the Act.

For these reasons, the Court held that the States had lost their immunity under the SIA by virtue of the exception to immunity provided by section 9(1). The Court did have jurisdiction over the States in this matter. It was therefore not strictly necessary to consider the other grounds advanced by the Club. However, the Court commented that there was force in the Club’s second ground – that proceedings in relation to the obligation to arbitrate in London were within the scope of an exception to immunity in the SIA – but not the third ground – it was clear that the States had disputed the jurisdiction of the Tribunal and the English courts throughout the proceedings.

The exercise of the Court’s discretion under section 66 of the Act

The final issue to be determined by the Court was whether to give its permission to the Club under section 66 of the Act to enforce the awards of the Tribunal. The wording of section 66 made it clear that this was a matter for the Court’s discretion.

The Court observed that its discretion under section 66 was a wide one to be exercised in the interests of justice. In particular, it noted that the discretion embraced issues such as the utility of a declaratory judgment, which was the form of judgment sought by the Club. Applying West Tankers Inc v Allianz SpA [2012] 1 Lloyd’s Rep 398, the Court held that there was clear utility in granting leave to enforce the declaratory awards of the Tribunal, as there was a real prospect of establishing the primacy of the awards over any inconsistent judgment which might be rendered in Spain. The Court added that it would not be appropriate to decide at this stage in proceedings whether, under the Brussels Regulation, an English judgment enforcing the awards of the Tribunal would take primacy over any inconsistent Spanish judgment. Moreover, it was not necessary to decide this point. It was sufficient if there was a real prospect of establishing primacy, and it was clear on the current authorities that there was.

The States emphasised that the Spanish court was the court first seised of the States’ cause of action and that ordinarily the Brussels Regulation would have imposed a mandatory stay on subsequent English proceedings pending the resolution of the Spanish proceedings. The fact that the Club’s section 66 proceedings fell outside the scope of the Brussels Regulation meant that the mandatory stay did not apply, so that the possibility of an English judgment being entered before a Spanish judgment arose. The States argued, however, that it would be an inappropriate exercise of the Court’s discretion under section 66 for it to permit enforcement of the awards of the Tribunal, as the result (i.e. the primacy of the awards) was not countenanced by the Brussels Regulation. The Court rejected this argument. Safeguarding the Brussels Regulation regime was not a good or sufficient reason for preventing the Club from seeking to realise the full benefit of the awards of the Tribunal when the regime did not apply to arbitration.

The States also made a more general objection to enforcement of the awards in view of the importance of, and public interest in, the Spanish proceedings. The Court recognised the significance of the States’ claims but held that it could not apply different rules depending on the public significance of the case in question. In addition, the Court stated its commitment to upholding the principle of freedom of contract and support for the enforcement of contracts freely entered into. The States’ claims were in substance claims under the Contract and the Club was entitled to enforce its rights under the Contract in relation to such claims. The Court therefore exercised its discretion to grant the Club’s application to enforce the awards of the Tribunal as judgments of the English courts.

Significance of the decision

The decision of the High Court is evidence of the commitment of the English courts to uphold contractual agreements to arbitrate where possible. The States gave the Court ample opportunity to decline to grant the Club leave to enforce the awards under section 66 of the Act, which was not seized upon by the Court.

The decision also provides helpful guidance on the arbitrability of claims that have a criminal aspect or are premised on a finding of criminal liability. It is clear that many such claims are arbitrable and that a fundamental distinction is to be made between, on the one hand, claims that involve criminal responsibility or criminal penal consequences and, on the other, those in which the issue of criminal liability is merely a step in establishing civil liability.

Lastly, the decision sheds light on the application of section 9(1) of the SIA by the English courts. In particular, it suggests that the exception to state immunity under section 9(1) will be applied broadly by the courts and consistently with the Act.

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

Christian Leathley
Christian Leathley
Partner
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+44 20 7466 2532
Hannah Ambrose
Hannah Ambrose
Professional Support Lawyer
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+44 20 7466 7585

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