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Court of Appeal refuses to enforce €855 million Spanish judgment inconsistent with earlier binding arbitral awards on grounds of public policy

Overview

In Spain v London Steam-Ship Owners’ Mutual Insurance Association Ltd,1 on 12 December 2024 the Court of Appeal upheld a Commercial Court ruling which refused to register and recognise a €855 million Spanish judgment issued against the London Steam-Ship Owners’ Mutual Insurance Association (the "Club"). The Spanish judgment was inconsistent with earlier arbitral awards issued in London in respect of the same dispute. In reaching this conclusion, the Court of Appeal recognised that the res judicata created by a binding arbitral award is essential in the legal order of the United Kingdom (UK), and therefore it would be manifestly contrary to public policy to recognise the inconsistent Spanish judgment in England & Wales.

The underlying dispute

This dispute arose out of the sinking of the oil tanker M/T Prestige (the "Prestige") off the coast of Spain in 2002. The resulting oil spillage caused significant pollution damage to the Spanish and French coastlines. Lengthy legal proceedings followed in the two decades thereafter between Spain and France on one side and the Club on the other (among other parties who were also involved in the proceedings).

The Club had provided insurance to the owners and managers of the Prestige in respect of the vessel. The terms of that insurance included two critical clauses which were at the heart of the subsequent litigation. The first was a dispute resolution clause which provided for any disputes to be referred to arbitration in London (the "Arbitration Clause"). The second was a "pay to be paid" clause which provided that the Club would only be liable under the terms of the insurance if the owners and managers of the Prestige had first paid the full amount of their liabilities out of their own monies (the "Pay to be Paid Clause").

The legal proceedings over the past two decades resulted in numerous judgments and decisions from the Spanish courts, English courts and the Court of Justice of the European Union ("CJEU") as well as arbitral awards. The events can be summarised as follows:

  1. Spain and France (together with a number of smaller claimants) initiated civil proceedings2 in the Spanish courts against the ship owners, managers and the Club in 2012, following a lengthy investigatory proceeding in the Spanish courts which concluded in 2010.

  2. At around the same time in 2012 (and whilst the Spanish proceedings remained ongoing), the Club commenced arbitration proceedings in London against Spain and France before sole arbitrator Alistair Schaff KC. Both Spain and France declined to take part in their respective arbitration. In 2013, Mr Schaff issued two awards in favour of the Club (the "Arbitral Awards"), declaring that (i) Spain and France are each bound by the Arbitration Clause and their claims must be referred to arbitration in London, and (ii) the Pay to be Paid Clause meant that the Club is not liable to Spain or France unless and until the owners and / or the managers of the Prestige had first paid the full amount of any insured liabilities out of pocket.

  3. Thereafter, the Club issued applications in the English Commercial Court to enforce the Arbitral Awards in the same manner as a judgment pursuant to section 66(1) of the Arbitration Act 1996.3 Hamblen J granted the Club's applications at first instance (dismissing challenges raised by Spain and France in response) and this ruling was then affirmed by the Court of Appeal which subsequently dismissed Spain and France's appeal in 2015 (together the "Section 66 Judgments").

  4. In 2016, the Spanish Supreme Court (among other decisions) imposed civil liability on the Prestige's Master, the owners, and the Club. The Spanish Provincial Court determined in 2019 that the Club was liable for around €855 million to Spain and France (together with other claimants) (the "Spanish Judgment").

  5. In 2019, Spain sought to have the Spanish Judgment registered in England under the Brussels I Regulation (the "Regulation").4 This issue came before Butcher J in the Commercial Court, who refused to register the Spanish Judgment. Spain appealed against Butcher's J's decision, leading to the Court of Appeal's judgment on 12 December 2024.

Whilst the procedural history of this case is complex (there were a total of five appeals5 heard before the Court of Appeal across a number of hearings in October and November 2024), the central issue determined by the Court of Appeal was whether the Judge was right to have refused to register the Spanish Judgment against the Club in England & Wales.

The key issue in dispute and Butcher J's judgment

Since the relevant events took place before Brexit, the Regulation was the applicable regime for the recognition and enforcement of foreign judgments which was considered by both Butcher J and then the Court of Appeal.

Article 33 of the Regulation provides that:

1. A judgment given in a Member State shall be recognised in the other Member States without any special procedure being required.

Article 34 sets out exceptions to the general rule in Article 33. The two exceptions considered by Butcher J and the Court of Appeal are:

A judgment shall not be recognised:

1. if such recognition is manifestly contrary to public policy in the Member State in which recognition is sought;

3. if it is irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought;

The Club had opposed the registration of the Spanish Judgment in England & Wales on the basis that (i) the Spanish Judgment was irreconcilable with the Arbitral Awards and the Section 66 Judgments pursuant to Article 34(3), and (ii) it would be manifestly contrary to English public policy pursuant to Article 34(1) to recognise the Spanish Judgment, because to do so would violate the principles of issue estoppel and res judicata by reason of the Arbitral Award and the Section 66 Judgments.

In considering the issues, Butcher J referred certain questions to the CJEU on the interpretation of Article 34(1) and (3). The CJEU's decision, on which Spain relied, determined that whilst a domestic judgment entered in the terms of an arbitral award is in principle capable of constituting a "judgment" under Article 34(3), Article 34(3) did not apply to the Section 66 Judgments in this instance because the underlying Arbitral Awards on which the judgments were entered had infringed certain fundamental rules of the Regulation.6 The CJEU further determined that, where Article 34(1) does not apply to a domestic judgment, Article 34(1) could not then be used as a reason to refuse recognition of a foreign judgment on the grounds that to do so would disregard the force of any res judicata created by that domestic judgment.

When this issue returned before Butcher J, the Judge decided that the CJEU decision nonetheless did not bind him to register the Spanish Judgment because the CJEU had exceeded its jurisdiction, on the basis that the CJEU had answered questions which were not referred, applied law to the facts, and based its reasoning on a misapprehension of the facts. Accordingly, the Judge held that the Section 66 Judgments created an issue estoppel and were irreconcilable judgments preventing the registration under Article 34(3) of the Regulation. The Judge further held that, in any event, the underlying Arbitral Awards created an issue estoppel in favour of the Club which would have prevented the registration of the Spanish Judgment as a matter of English public policy under Article 34(1) of the Regulation.

The Court of Appeal's judgment - was the Judge right to have refused to register the Spanish Judgment as against the Club?

The Court of Appeal held that the Judge achieved the correct result in refusing to register the Spanish Judgment, but disagreed with the Judge on his reasoning.

Firstly, the Court of Appeal concluded that the Judge was indeed bound to follow what the CJEU had decided. Although the CJEU had answered the questions referred to it in a manner which the Judge had not anticipated, the CJEU had not exceeded its jurisdiction or violated the principles of procedural fairness.

The Court of Appeal further disagreed that the Section 66 Judgments had created issue estoppels justifying the Judge's departure from the CJEU's interpretation of Article 34(3). Neither Hamblen J nor the Court of Appeal had decided finally whether the Section 66 Judgments would achieve primacy under the Regulation over any future inconsistent judgment rendered in Spain. Accordingly, the Spanish Judgment ought to have been registered on a proper application of the CJEU's interpretation of Article 34(3).

However, and crucially, the Court of Appeal observed that at no point did the CJEU decide that the public policy ground in Article 34(1) of the Regulation could not be used as a reason for refusing recognition of a foreign judgment on the basis of res judicata created by an arbitral award itself (as opposed to a judgment entered on the terms of an arbitral award). The Court of Appeal agreed with the Judge that the underlying Arbitral Awards created a binding issue estoppel between the parties which prevented the Spanish Judgment from being registered in England & Wales, and that it would "constitute a manifest breach of a rule of law regarded as essential in the legal order" of England & Wales if the courts fail to give effect to this issue estoppel. In reaching this conclusion, the Court of Appeal recognised the following key reasons in support:

  1. There must be finality to litigation – it is wrong as a matter of fundamental legal principle for English courts to ignore / to allow parties to ignore arbitral decisions by which those parties have been finally held by the courts of competent jurisdiction to be bound;

  2. The regime of the New York Convention makes clear that it would be wholly undesirable, as a matter of English public policy, to ignore the Arbitral Awards. The Regulation does not affect the application of the New York Convention; and

  3. The ability of international parties to agree to binding international arbitration "is of great importance to the legal system in England and Wales and to the economy of the United Kingdom". This militates in favour of considering the issue estoppel created by a binding arbitral award as being an essential part of the legal order of the UK.

What this means for the future of arbitration and enforcement of foreign judgments in the UK

The Court of Appeal's judgment serves as an important reminder that parties' freedom to arbitrate (and have their agreement to arbitrate be enforced) is enshrined as an essential principle of the legal order in the UK.

Whilst the Court of Appeal's judgment considered the interaction between a domestic arbitral award and an inconsistent foreign judgment in the context of the pre-Brexit regime, the principles arising out of this judgment are likely to remain relevant to future enforcement of foreign judgments in the UK. In June 2024, the UK ratified the Hague Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (the "Hague Convention 2019"). The Hague Convention 2019 is due to come in force in the UK on 1 July 2025, and is expected to address the array of gaps and uncertainties under the post-Brexit regime which consists of the 2005 Hague Convention on Choice of Court Agreements and common law.

Similarly to the Regulation, the Hague Convention 2019 requires contracting parties to recognize and enforce judgments given by the court of another contracting State, subject to certain limited exceptions set out in Article 7. These exceptions include, for example: (i) where recognition or enforcement of a judgment would be "manifestly incompatible" with the public policy of the contracting State where enforcement is sought, (ii) where the judgment being enforced resulted from proceedings brought contrary to a choice of court agreement, and (iii) where the judgment is inconsistent with an earlier judgment between the same parties given by a court in the State where enforcement is sought. Whilst the operation of these exceptions is yet to be tested before the English courts, the Court of Appeal judgment suggests that the English courts may well take a similarly robust approach in applying Article 7 to give primacy to a binding domestic arbitral awards over a foreign judgment which is inconsistent with that earlier award.

Footnotes

  1. Spain v London Steam-Ship Owners’ Mutual Insurance Association Ltd [2024] EWCA Civ 1536.
  2. The main civil claims were made under article 117 of the Spanish Penal Code 1995, which provided third-party victims (such as Spain and France) with a right of direct action against the liability insurer (such as the Club).
  3. Section 66(1) of the Arbitration Act 1996 states "An award made by the tribunal pursuant to an arbitration agreement may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect".
  4. In 2019, the Club also commenced fresh arbitration proceedings against Spain and France seeking (among other things) an anti-suit injunction to restrain the breach of the States' equitable obligation to arbitration or damages in lieu. This was considered as a subsidiary question by the Court of Appeal, who concluded that the Club could not have, in any event, be awarded an injunction restraining the Spanish proceedings as against Spain and France (the reasoning for this is explained at footnote 5).
  5. The other issues considered before the Court of Appeal concerned: (i) whether the Judge was right to hold that arbitrators had the power to award the Club equitable compensation against Spain and France for breach of their equitable obligation to arbitrate their disputes with the Club, and (ii) whether the Judge was right to conclude that registration of the Spanish Judgment should not be refused under Article 34(1) of the Regulation as being manifestly contrary to English public policy on human right. The Court of Appeal allowed Spain and France's appeals on (i), concluding that although the Club could have obtained an injunction restraining the Spanish proceedings against non-State parties or been awarded damages in lieu, the Club could not have obtained an injunction to restrain Spain or France from pursuing the Spanish proceedings due to section 13(2)(a) of the State Immunity Act 1978, which deprived the English courts of the power to grant an injunction against a State, where it did not consent. In circumstances where neither an injunction nor damages in lieu are available, equitable compensation could not be granted. The Court of Appeal agreed with the Judge's ruling on (ii) and dismissed the Club's appeal, rejecting the Club's argument that the Spanish Judgment should not be registered because of the Spanish Court's alleged manifest breaches of the public policy of England & Wales.
  6. Including the rule of lis pendens under Article 27 of the Brussels I Regulation, because proceedings were already before the Spanish courts between (effectively) the same parties in respect of (effectively) the same cause of action before the arbitration proceedings were commenced in London.

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