Key takeaways
Direct right of action
Third party enforcing contractual rights must comply with contractual arbitration provision.
Obligation to arbitrate
This is a contractual obligation enforceable at common law.
Breach of obligation to arbitrate
Can result in an award of damages for breach of contract.
The Kingdom of Spain & another -v- The London Steam-Ship Owners’ Mutual Insurance Association Limited (No. 2) (Prestige) [2026] UKSC 36
In 2002, the tanker Prestige, carrying 70,000 tonnes of oil, was damaged in a storm and sank off the Spanish coast. The resulting oil spill caused widespread pollution damage to the Spanish and French coastlines.
The environmental disaster resulted in numerous claims that have been pursued in London arbitration proceedings, English court proceedings, Spanish court proceedings and in the CJEU. No single article can do justice to all the issues that have been dealt with over the years.
This article focuses on the recent UK Supreme Court decision that dealt with the following key issue: where a third party seeks to assert a right derived from an insurance contract and does so in court proceedings in breach of an arbitration provision in the insurance contract, can the insurer claim its losses arising out of any court judgment? And, if so, is that on a contractual or on an equitable basis?
The Supreme Court has found that common law damages for breach of contract were recoverable.
This is a significant decision for the marine insurance sector and for insurance generally, as well as for international arbitration and those incorporating arbitration provisions in their insurance and other contracts.
The background facts
At the relevant time, the owners and managers of the Prestige had P & I insurance cover with the London Steam-Ship Owner’s Mutual Insurance Association Limited (Club). The Club’s Rules incorporated:
A ‘pay to be paid’ clause, which made payment of the full amount of the member's liability a condition precedent to its right of recovery under the insurance contract.
A London arbitration clause, which required disputes to be referred to arbitration in London and for the arbitration to be subject to English law.
Spanish court proceedings
Many civil claims arose from the incident, including claims brought by Spain and France (States) in the Spanish courts under a Spanish statutory provision that effectively gives third parties a direct right of action against an insurer in respect of liabilities arising from an insured event.
This Spanish statutory right is similar to those found in English law, under the Third Parties (Rights against Insurers) Act 2010 and, more generally, the Contracts (Rights of Third Parties) Act 1999, which enable third parties to enforce contracts provided statutory requirements are met.
In 2019, the Spanish Court handed down a judgment in favour of the States, awarding Spain around Euros 2.35 billion and France around Euros 117 million, subject to the US$1 billion limit of the insurance cover.
London arbitration proceedings
The Club commenced London arbitration proceedings against each State. The Tribunal held as follows:
The States’ claims were to enforce a contractual obligation derived from the contract of insurance. Therefore, they had to enforce the contract of insurance in accordance with its terms, including the arbitration clause.
The States were bound by the arbitration clause in the insurance contract and all claims against the Club had to be referred to arbitration.
Pursuant to the pay to be paid clause, as the owners had not paid the amount of any insured liability, the Club was not liable to the States.
The Club successfully applied to the Court to have these awards enforced as judgments pursuant to s.66 Arbitration Act 1996. The States’ jurisdictional challenge on the ground of state immunity was unsuccessful.
The Club then commenced further arbitration proceedings, seeking declarations, injunctions and monetary compensation on the basis that Spain had breached their obligation to arbitrate.
As against Spain, the Tribunal decided that it had the power to award equitable compensation and/or equitable damages in lieu of an injunction under s.50 Senior Courts Act 1951, so long as there was no double recovery.
As against France, the (different) Tribunal held that it could award equitable compensation. It also granted an injunction and so did not need to decide whether it could also award equitable damages under s.50.
English court proceedings
On appeal from the awards, the Commercial Court held that the Tribunal did not have the power to award an injunction or equitable damages in lieu under s.50. However, it did have the power to award equitable compensation for breach of the obligation to arbitrate.
The Court of Appeal disagreed with the latter finding, deciding that the Tribunal did not have the power to award equitable compensation for breach of the ‘equitable’ obligation to arbitrate.
The Supreme Court decision
In the context of this case, the conditional benefit principle means that the third party who seeks to take the benefit of an insurance contract by bringing a direct right of action against the insurer must also take the ‘burden’ of having to comply with the arbitration agreement and bring its claim in arbitration.
In deciding what are the consequences of breaching the obligation to arbitrate, the Court must consider the nature of the obligation. In the Supreme Court’s view, the third party who chooses to claim the benefit of the insurance contract by asserting a right under the contract must be treated, for the purposes of the arbitration clause, as if it were party to the insurance contract.
The third party is therefore bound by the obligation to arbitrate any dispute relating to its claim in the same way as a party to the insurance contract. Thus, a breach of that obligation is treated as being a breach of contract.
The Supreme Court thought that it would be irrational for a third party to be in a potentially better position than the original contracting party who would be bound by the arbitration clause. This could be avoided by treating the third party as a party to the arbitration agreement and therefore subject to the usual remedies for breach of contract.
The Supreme Court held that the Court of Appeal was wrong to have treated the obligation to arbitrate as an equitable one, rather than a contractual one that was enforceable at common law, usually by awarding damages.
Among other things, an equitable remedy was discretionary and there might be equitable defences that would bar a claim for equitable compensation but not a claim for common law damages.
The Supreme Court drew a parallel with s.8(1) of the Contracts (Rights of Third Parties) Act 1999, which treats a third party as a party to any arbitration agreement when it wants to enforce the substantive terms of the relevant contract.
Having considered the key cases dealing with the nature and scope of a third party’s obligation to arbitrate, the Supreme Court decided that they led to the conclusion that the third party is regarded as under a contractual obligation to arbitrate. That was inconsistent with treating the obligation as equitable.
Equitable compensation was not, therefore, available as a remedy. The monetary relief granted by the Tribunals was, therefore, granted on a mistaken basis. However, the Supreme Court decided not to remit the awards to the arbitrators to reconsider the relief granted. The awards should merely be varied to add a recital to clarify the legal basis, namely contractual rather than equitable, on which the Supreme Court had upheld the amounts of damages awarded by the arbitrators.
Comment
This is a noteworthy conclusion to a long-standing dispute and will be welcomed by the P & I sector. It is also a confirmation that the English courts will seek to uphold and enforce arbitration agreements, including as against third parties where appropriate.
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