The "Prestige"  EWCA Civ 333
English Court of Appeal, 1 April 2015
The Court of Appeal was asked to consider the characterisation of claims, state immunity and the arbitrability of claims between a protection and indemnity association and a third party.
The proceedings arose following the sinking of the vessel "Prestige" off the coast of Spain in November 2002. The vessel was carrying a large amount of fuel oil which spilled into the sea causing significant pollution to the surrounding environment. The owners of the vessel were members of a protection and indemnity association (the "Club") which, pursuant to a contract of insurance, and on terms set out in its rules, provided protection and indemnity insurance ("P&I") and freight, demurrage and defence ("FD&D") insurance cover in respect of the vessel.
In 2010, a Spanish court ordered that civil claims be advanced against the owners, managers and operators of the vessel, and the Club. France joined the proceedings making similar claims. Those claims were made under the Spanish Penal Code which provides that a person who has suffered injury as a result of a criminal offence can recover damages in the criminal proceedings in respect of his loss. France and Spain also made claims against the Club under Article 117 of the Spanish Penal Code which enables an injured party to pursue a direct claim against the defendant's insurer.
The Club refused to participate in the Spanish civil proceedings and commenced arbitration in London against France and Spain in January 2012 on the grounds that the insurance contract with the Club was governed by English law and that France and Spain were bound by the arbitration clause contained in the Club's rules. The Club's rules also contained a "pay to be paid" clause and the Club maintained that pursuant to the "pay to be paid" clause, it was under no liability to France or Spain.
Both France and Spain refused to participate in the arbitration on the grounds that they were not a party to the arbitration agreement with the Club, and they disputed the jurisdiction of the arbitral tribunal.
The Club obtained an arbitration award in its favour and sought to enforce the awards under section 66 of the Arbitration Act 1996 (the "Act"). France and Spain sought to challenge the applications on the grounds that as states, they were immune from proceedings by reason of the State Immunity Act 1978. However, in the course of those proceedings, they issued applications under sections 67 and 72 of the Act on the basis that the awards had been made without jurisdiction. The grounds on which they sought relief were that the rights they sought to enforce against the Club arose under Spanish law, independently of the contract of insurance. They also contended that the claims were not arbitrable.
Decision at First Instance
In October 2013, the Club sought to enforce the arbitration awards and Spain and France sought to challenge the jurisdiction of the arbitral tribunal. The Court held that the claims against Spain and France were to be characterised in English law as claims to enforce English law obligations, rather than independent Spanish statutory rights, and that those obligations could only be enforced in accordance with their terms (i.e. by arbitration). The Court held that Spain and France had become parties to the arbitration agreement and were not entitled to state immunity; that the claims were arbitrable; and that it was appropriate to give permission to enforce the awards as judgments. France and Spain were therefore unsuccessful in their applications for declarations that the awards had been made without jurisdiction and the Club was given permission to enforce the awards.
Court of Appeal
Spain and France were given permission to appeal against the judge's orders in respect of his decisions on characterisation, state immunity and enforcement. Permission to appeal in relation to arbitrability was refused. In the event, France and Spain dropped their challenge in relation to enforcement and sought permission to appeal the arbitrability of the claims from the Court of Appeal.
As regards characterisation, the Court considered whether Spain and France were bound by the arbitration clause, and whether the "pay to be paid" clause in the insurance contract operated to defeat a claim under the insurance contract. The Court considered two possibilities- a right to enforce an obligation defined by the contract of insurance and an independent statutory right against the insurer created by Spanish legislation and independent of a contract.
Lord Justice Moore-Bick held that in his view, the critical question is what, in substance, was the nature of the right that the legislation was seeking to confer on the third party. He concluded that the issues relating to Spain's and France's right to seek compensation from the Club are to be characterised as issues relating to an obligation sounding in contract. As such, the issues were to be determined in accordance with English law, and accordingly France and Spain must pursue claims against the Club in arbitration and in accordance with the terms of the insurance contract, and subject to the "pay to be paid" clause.
Following the Club's service of enforcement proceedings in March 2014 pursuant to an order for service out of the jurisdiction, Spain filed an acknowledgment of service in which it stated its intention to set aside the order granting permission for service out of the jurisdiction. However, Spain did not complete the box showing their intention to dispute the court's jurisdiction, and it did not make an application to set aside the order for service out, or take any practical steps to dispute the court's jurisdiction.
In June 2013, Spain applied for an extension of time within which to file evidence in response to the Club's application and to issue proceedings under sections 67 and 72 of the Act seeking a declaration that the award had been made without jurisdiction.
In August 2013, Spain issued an application for relief under sections 67 and 72 of the Act and filed evidence opposing the Club's application and supporting their own application.
The general rule is that a state is immune from proceedings, save to the extent that it has consented to the jurisdiction, either expressly or by taking a step in the proceedings of a kind that demonstrates an election to waive immunity. Lord Justice Moore-Bick held that in his view, a state which has filed an acknowledgement of service but has failed to take any action to challenge the jurisdiction of the Court, cannot be treated as having submitted to the jurisdiction. However, he held that in choosing to apply for relief under sections 67 and 72 of the Act, Spain took a step in the proceedings otherwise than for the sole purpose of claiming immunity. He therefore deemed Spain to have submitted to the jurisdiction.
The situation was slightly different in relation to France. Following the Club's service of enforcement proceedings against it, France did not file an acknowledgement of service, and did not make an application to dispute the court's jurisdiction. However, in August 2013, France issued an application for relief under sections 67 and 72 of the Act. Lord Justice Moore-Bick held (for the same reasons as he did in relation to Spain), that the issue of the application notice constituted a step in the proceedings and that France too had submitted to the jurisdiction.
Are the claims arbitrable?
It was argued by France and Spain that their claims made in the Spanish proceedings were inherently incapable of being determined by arbitration because a criminal conviction in the proceedings was an essential element of the cause of action against the insurer. Lord Justice Moore-Bick agreed with the Court of first instance that a conviction is not an integral element of the cause of action, and that the right to recover from the insurer depends on proof of an insured liability under the insurance contract, and does not require a finding of criminal liability. The issues to be determined by the arbitrator were whether France and Spain were bound by the arbitration clause in the Club's contract of insurance, and whether the "pay to be paid" clause was effective to defeat their claims. Such matters are capable of being the subject of an arbitration award.
To conclude, the Court held that the obligation that France and Spain sought to enforce against the Club is governed by English law, and can only be enforced by arbitration in accordance with the Club rules.