In the context of a right of direct action by an injured party (Spain and France) against a D&I insurer, in The London Steamship Owners' Mutual Insurance Association Ltd v The Kingdom of Spain & anr [2015] EWCA Civ 333, 1 April 2015, Spain and France were held bound by an arbitration agreement contained in an insurance policy which they never signed. The case is an illustration of the circumstances in which state immunity will be waived and defines who is a "party" to an arbitration agreement contained in an insurance policy. It is also a reminder of the very limited category of disputes that will be inarbitrable under English law.
The Prestige sank off the west coast of Spain in 2002. It was carrying 70,000 tonnes of fuel oil which polluted the Atlantic coastline of Spain and France.
The Spanish and French authorities commenced criminal court proceedings against the ship's officers, its owners and the owners' protection and indemnity insurers (the Club), seeking (inter alia) damages resulting from the pollution. The claims against the Club, including for indemnification relating to the owners' vicarious liability for the acts of the officers, were brought under Article 117 of the Spanish Penal Code which allows an injured party to pursue a right of direct action against the defendant's insurer (the Spanish claims).
The Club refused to take part in the proceedings in Spain, instead commencing arbitration in London seeking declarations that Spain and France were bound by the arbitration clause in the Club's rules and that it was not liable under the relevant contract of insurance (the Club's Policy). The tribunal issued an award in the Club's favour, which the Club then sought to enforce under s66 Arbitration Act 1996 (the Act).
Spain and France opposed the application, relying on state immunity. During the course of the proceedings disposing of the application, Spain and France issued their own applications under ss67 and 72 of the Act seeking a declaration that the tribunal lacked jurisdiction in respect of the matters addressed in their award. Spain and France argued that the rights they sought to enforce in the Spanish courts were not rights under the Club's Policy (containing the arbitration agreement) but rather independent rights under Spanish statute.
At first instance, Hamblen J held (inter alia): (a) that the claims were English law claims under the Club's Policy, not statutory claims and were therefore prima facie caught by the arbitration agreement in the Club's Policy; (b) that Spain and France had become parties to the arbitration agreement in the Club's Policy and had therefore waived immunity; and (c) that the claims against the Club arising under statute and in criminal proceedings in Spain were arbitrable. Spain and France appealed against these aspects of the decision.
Spain and France bound by the arbitration agreement in the Club's Policy
The central question before the Court of Appeal was whether Spain and France were bound to pursue the Spanish claims against the Club in arbitration pursuant to the terms of the Club's Policy. This depended on the nature of the right which they sought to enforce – was it statutory or contractual?
If the right was contractual (ie arose out of the Club's Policy), the Spanish claims were in breach of the arbitration agreement in the Club's Policy and (subject to the issue of immunity) the tribunal had jurisdiction over those claims. If the right arose under the Spanish Penal Code, the award was issued without jurisdiction.
Spain and France argued that they were enforcing rights which arose independently of the Club's Policy, under Article 177 of the Spanish Penal Code (focusing on the source and essential nature of the right). The Club argued that the Spanish claims reflected the terms of and arose from the Club's Policy, and not the Spanish statute (focusing instead on the content of the liability).
The Court of Appeal agreed with the Club and upheld the judgment of Hamblen J. While acknowledging that direct action claims inevitably involve both statutory and contractual rights, the Court of Appeal nevertheless found that the right of Spain and France to seek compensation from the Club gave rise to issues arising from the Club's Policy, was governed by English law and fell within the scope of the arbitration agreement contained in the Club's Policy.
Central to this was the Court of Appeal's characterisation of the nature of the right that the Spanish legislation conferred on Spain and France against the Club. The Court of Appeal determined that the statutory right of direct action effectively mirrored the rights under the Club's Policy. Critical to this finding was the fact that the Spanish legislation entitled the Club to raise in its defence any defences that would have been available had the action been brought by the owners of the Prestige under the Club Policy itself, including the "pay to be paid" clause. The underlying nature of the right was therefore founded in and its content defined by the Club's Policy and it must therefore be enforced in accordance with the Club's Policy, including its arbitration agreement. Only if the legislation "prevents the insurer from relying in defence of a claim on important provisions [of the insurance contract] which define the scope of his liability" might the court conclude that the legislation has created a new right. In that case, the claim would instead be governed by the law of the country whose legislation created the right in the first place.
Were Spain and France nevertheless entitled to state immunity?
Having determined that the Spanish claims fell within the scope of the arbitration agreement in the Club's Policy, the Court of Appeal next had to determine whether Spain and France were in any event immune from the jurisdiction of the English court with respect to the applications under ss66, 67 and 72.
The Club argued that Spain and France had waived immunity because: (a) they had taken a step in the English proceedings by failing to challenge the court's jurisdiction, by failing to file an acknowledgement of service and by bringing their own applications under ss67 and 72 of the Act; (b) they had submitted themselves to the jurisdiction of the English court within s9(1) State Immunity Act 1978 because they had agreed to arbitrate the dispute relating to jurisdiction and the Club's liability; and (c) the proceedings in the English court (under s66 of the Act) related to a contractual obligation which fell to be performed in the United Kingdom, within the meaning of s3(1)(b) State Immunity Act 1978.
(a) Had Spain and France taken a step in the proceedings?
The Court of Appeal found that Spain and France had taken a step evidencing an unequivocal decision to waive immunity and allow the court to determine the claim on the merits.
The failure to file an acknowledgement of service and formal challenge to the court's jurisdiction were not waivers of immunity because the steps taken by Spain in that regard were taken solely for the purpose of claiming immunity.
However, by the application under ss67 and 72, Spain and France sought a declaration that the arbitrator did not have jurisdiction because there was no arbitration agreement between themselves and the Club. That, the Court of Appeal found, was clearly directed at the substantive grounds for setting aside the award and had nothing to do with Spain and France's right to claim immunity. The fact that Spain and France had made that application when they did only in order to comply with the compressed timetable imposed by the court was irrelevant.
(b) Had Spain and France agreed in writing to submit the Spanish claims to arbitration?
The Court of Appeal also held (by reference to the decision in Through Transport Insurance Association (Eurasia) Ltd v New India Assurance Co Ltd [2003] EWHC 3158 (Comm) and of the Court of Appeal in Svenska Petroleum Exploration AB v Lithuania (No 2) [2005] EWHC 2437 (Comm)) that by the Spanish claims, Spain and France had consented to arbitration.
The mere existence of a statutory right to enforce a claim arising out of a contract containing an arbitration agreement will not, in itself, constitute an agreement in writing to submit a certain type of dispute to arbitration. However, the fact that Spain and France had commenced proceedings in Spain in reliance on that right was found to be sufficient for that purpose. Applying the principles in Through Transport, the Court of Appeal found that, in availing themselves of the statutory right, Spain and France had become a person claiming through or under an insurance policy containing an arbitration agreement and thereby a "party" to that arbitration agreement for the purpose of s82(2) of the Act. In so holding, the Court of Appeal rejected the argument that a State will only fall within the scope of s9(1) State Immunity Act 1978 if it has expressly consented to arbitrate a dispute by signing the arbitration agreement.
On the basis of its findings in relation to the first two questions, the Court of Appeal declined to consider the third question, noting only that the answer to the question "is not straightforward".
Were the Spanish claims arbitrable?
Having dealt with the scope of the arbitration agreement in the Club Policy, the Court of Appeal also had to address the question of whether the Spanish claims were arbitrable, grounded as they were in statute and relating to criminal offences.
Spain and France argued that the Spanish claims were inherently inarbitrable because a criminal conviction was an essential element of the cause of action under Article 117 of the Spanish Civil Code. The Court of Appeal disagreed. The cause of action depended on proof of an insured liability, not on a criminal conviction. However, the Court of Appeal went on to hold that even if the criminal conviction were a pre-condition to the right to recover, there would still be no reason why the arbitrator should not determine the claim. While the arbitrator could not formally convict any person of a criminal offence, he or she could take into account whether or not the required pre-condition had been met for the purpose of determining civil liability.
COMMENT
There are several points of interest arising out of this case relating to four inter-related but distinct themes: the scope of an arbitration agreement, issues of state immunity and the arbitrability of statutory (or other) claims involving potential criminal liability. They are as follows:
(a) Scope of the arbitration agreement. Whether claims relying on rights of direct action created by statute are caught by an arbitration agreement contained in the underlying policy of insurance will depend on a proper characterisation of the right in question. If the legislation limits the right of the insurer to rely on contractual defences against the party claiming under the statute, this will be an indication that the right is an independent one, created by statute and falling outside of the arbitration agreement. If not, the statutory claim will be treated as one arising under the policy and will be subject to any jurisdiction or arbitration agreement contained therein.
(b) Immunity. In deciding whether or not a State has waived its right to immunity, the determining factor will be the conduct of the State in the proceedings and not any statement of its intention to challenge jurisdiction. An application seeking declaratory relief in respect of the substance of the claim at issue (here, whether or not the arbitral tribunal had jurisdiction) is clearly a "step in the proceedings", even if it was done in order to ensure compliance with a compressed timetable.
(c) Immunity. A State may be taken to have waived immunity for the purpose of s9(1) State Immunity Act 1978 even if it has not signed the arbitration agreement in question. That will be so where, for example, the State brings a claim as a "party" within the meaning of s82(2) of the Act (as in Through Transport) by relying on a statutory right of direct action against the insurer.
(d) Arbitrability. There are accepted categories of dispute which are inherently unsuitable for determination by private arbitration – they are "inarbitrable". While there is no accepted definition of the term, a claim will be inarbitrable where the dispute involves an issue of public policy, public rights or the interests of third parties, or where the dispute in question is covered by a statutory regime which provides for inalienable access to the courts. It is accepted that crime, generally, is inarbitrable and that a tribunal has no jurisdiction to convict a person of a criminal offence (just as a tribunal has no jurisdiction to make orders that are the exclusive preserve of the court, such as the winding up of a company: see Fulham Football Club (1987) Ltd v Richards & anr [2011] EWCA Civ 855). However, as the Court of Appeal in this case confirmed, a tribunal may make findings of fact which constitute a criminal offence (such as whether or not a bribe has been paid) or may even find that a criminal offence has been committed. The decision of the Court of Appeal on the arbitrability of the Spanish claims in this case therefore confirms the increasingly limited reach of arbitrability in defeating claims that it is said belong in arbitration.
