Court of Appeal considers whether right of direct action against an insurer under foreign law was subject to the terms of the insurance policy

The first instance decision in this case was reported in Weekly Update 40/13. The claimant insured a vessel which sank off the coast of Spain, causing an ecological disaster. Both Spain and France brought criminal proceedings directly against the insurer in Spain (relying on both the International Convention on Civil Liability for Oil Pollution Damage ("the CLC") and Spanish legislation (for non-CLC claims relating to the insurer's obligation to indemnify the owners against their independent liability for the tortious acts of the master)). The insurer obtained negative declaratory relief from a London arbitral tribunal and sought to enforce the award as a judgment in England. The key issue was whether the direct action brought by Spain and France for the non-CLC claims was subject to the terms of the insurance policy (and, in particular, the arbitration agreement and "pay to be paid" clause). Spain and France argued that they were not bound by the arbitration agreement in the policy because their rights of direct action arose independently under Spanish law.

At first instance, Hamblen J granted the application to enforce the award as an English judgment (with the result that the insurer could rely on the (then) Article 34(3) of the Judgments Regulation to prevent recognition of any later Spanish judgment against the insurer). Spain and France appealed and the Court of Appeal has now held as follows:

(1) The nature of the right conferred by Spanish legislation is defined by the insurance policy (and is not an independent statutory right): "Where a wrongdoer is insured against liability of some kind it will be possible to identify an insurer who may be held liable in his place, but, unless the legislation is intended to work in an arbitrary fashion, it will be necessary to establish that the contract covers the liability in question. That in turn means ascertaining the limits of the insurer's obligation, which also means that he should be able to raise any defences that would be available to him in an action brought by the insured" (as per Moore-Bick LJ). It is only if the legislation conferring the right of direct action expressly prevents the insurer from relying on the terms of the policy that it can be said that a new right (which is not intended to mirror in substance the insurer's liability under the policy) has been created. In this case, the Spanish legislation in question pointed to the conclusion that it was intended to enable the enforcement of obligations arising under the insurance policy. Since the policy provided for London arbitration, under English law Spain and France must pursue their claims against the insurer in arbitration.

(2) France and Spain were not entitled to claim state immunity for the following reasons:

(a) They had "taken a step" in the English proceedings (and so the exception set out in section 2(3) of the State Immunity Act 1978 applied). The Court of Appeal confirmed that merely filing an acknowledgment of service does not amount to a waiver of immunity (in this case, the box headed "I intend to dispute the court's jurisdiction" had not been ticked).

However, Spain and France had commenced proceedings under section 67 and 72 of the Arbitration Act 1996 (challenging the award) and so had waived immunity in relation to the insurer's application under section 66 of the Act (to enforce the award) too: "If the application had been issued only for the purposes of claiming immunity, it would not have constituted a relevant step in the proceedings… but in fact by its application notice Spain sought a declaration that the arbitrator did not have substantive jurisdiction because there was no arbitration agreement between itself and the [insurer]. The application notice, therefore, was directed to the substantive grounds for setting aside the award and had nothing to do with Spain's right to claim immunity from the jurisdiction of the court".

(b) Although not necessary to decide the point, the Court of Appeal also held that section 9(1) of the 1978 Act applied: "Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration".

Spain and France had not consented to the arbitration merely by acquiring a right under Spanish law to make a claim against the insurer. However, by bringing proceedings in Spain to enforce against the insurer an obligation which was subject to an arbitration clause, it was held that they had consented to arbitration. The Court of Appeal agreed with Hamblen J that there was no need for a document signed by or on behalf of the state for there to be an "agreement in writing". Instead, by pursuing the claim in Spain, Spain and France had adopted the arbitration clause (even though they had not formally signed it).

Accordingly, the appeal against the order enforcing the award was dismissed.