Following the sinking of a vessel off the Spanish coast, causing significant environmental damage, the Kingdom of Spain brought civil claims in Spain against the vessel owner’s insurer, relying on a Spanish law which provided for the direct civil liability of liability insurers. The insurer then commenced arbitration proceedings against Spain in London, in which the arbitrator made an award declaring that Spain was bound by an arbitration clause in the contract of insurance between the vessel owner and the insurer and that therefore its civil claim had to be referred to London arbitration. The insurer obtained an order under section 66 of the Arbitration Act 1996 giving it leave to enforce the award and entering judgment in terms of the award. Subsequently Spain obtained judgment against the insurer in the Spanish proceedings, which it had pursued in disregard of the arbitration clause and the English arbitration proceedings, and the Spanish court granted an enforcement order setting out the sums payable. Spain then successfully applied for recognition of the enforcement order in England and Wales, pursuant to article 33 of Council Regulation (EC) No 44/2001. The insurer appealed on the grounds that (i) the Spanish judgment was irreconcilable with the prior judgment of the English court entering judgment in terms of the arbitral award, for the purposes of article 34(3) of the Regulation; and (ii) in any event, recognition of the Spanish judgment would be manifestly contrary to English public policy with regard to res judicata, for the purposes of article 34(1) of the Regulation. The court stayed the proceedings and referred to the Court of Justice of the European Union (“CJEU”) for a preliminary ruling questions concerning the proper interpretation of article 34. The CJEU held that a judgment on an arbitration award only fell within article 34(3) when a judgment on the same terms could have been entered by the enforcing court. In the present case the CJEU held that there were two jurisdictional rules in the Regulation which would have deprived the English court of jurisdiction, namely the mandatory insurance provisions in favour of injured parties and the lis pendens rule. On the resumed hearing of the insurer’s appeal against the recognition order, Spain contended in relation to article 34(3) that section 66 judgment was not a relevant local judgment for the purposes of article 34(3) because (i) it was not a judgment in which the matters at issue were decided by the courts of a member state themselves, (ii) it was a non-Regulation judgment as it fell within the arbitration exception in article 1(2)(d) of the Regulation, (iii) under the Regulation’s insurance provisions, the Spanish rather than English courts had exclusive jurisdiction in respect of the claims, and (iv) the decision of the CJEU on the reference was a binding determination to the effect that article 34(3) was not applicable in the present case. In relation to the public policy exception in article 34(1), Spain contended that it was not applicable because (i) res judicata was not a rule of public policy for the purposes of the Regulation, and (ii) the consequences of res judicata were exclusively dealt with by article 34(3). Spain also sought permission to appeal from a second arbitral award obtained by the insurer, by which Spain had been ordered to pay equitable compensation for breach of its equitable obligation to arbitrate, and pay damages in lieu of an injunction. Spain contended that (i) equitable compensation was not available outside a fiduciary context, and (ii) under section 48(5) of the Arbitration Act 1996 the arbitrator only had the same powers as the court, which, under section 13(2) of the State Immunity Act 1978, could not grant an injunction against a sovereign state without its written consent. There being no power an injunction against a state, there could be no power to grant damages in lieu of an injunction.
On the insurer’s appeal and Spain’s application for permission to appeal—
Held, insurer’s appeal allowed. (1) Under section 66 of the Arbitration Act 1996 the court had to make a judicial determination as to whether to exercise its discretion to permit the award to be enforced in the same manner as a judgment, and under section 66(2) whether to permit judgment to be entered in the terms of the award. Each could involve questions as to the jurisdiction of the arbitration tribunal, as well as consideration of the practicability and usefulness of granting the order, arbitrability, issues of public policy and the interests of third parties. A section 66 judgment was, therefore, not akin to a court approved settlement that was determined by the parties’ contractual agreement. Accordingly, such an order was not excluded from being a relevant judgment for the purposes of article 34(3) of Regulation (EC) No 44/2001 on the basis that it did not decide any, or any relevant, issues between the parties (paras 113–115, 120, 368).
(2) To hold that a judgment falling within the arbitration exception in article 1(2)(d) of the Regulation did not count as a judgment for the purposes of article 34(3) would give rise to a significant disturbance of the rule of law in the state in which enforcement was sought and to the absurd result that a foreign arbitral award would be in a superior position within the state’s legal order to a domestic arbitral award which had been enforced by its courts. For those reasons and others the argument that a section 66 judgment was not a relevant judgment because it was outside the subject matter scope of the Regulation was incorrect (paras 133–134, 139).
(3) In deciding whether a judgment qualified as a relevant local judgment under article 34(3) of the Regulation, it was not necessary or permissible to review whether the local court, or the courts of another member state had had jurisdiction under the Regulation’s insurance provision. Accordingly, the Regulation’s insurance provisions did not prevent a section 66 judgment from being a relevant local judgment (para 155).
(4) If the CJEU purported to answer a question falling outside those referred to it, the national court was not bound to follow any such purported answer, although it would not lightly so hold. In the present case, the CJEU had gone outside the questions which had been referred to it. In particular, there had been no question directed at whether article 34(3) of the Regulation might be inapplicable because the English judgment had been entered in circumstances where the English court could not have entertained the claim which was the subject of the Spanish proceedings. Accordingly, the parts of the CJEU judgment dealing with those issues were not binding and the court would not follow them. Furthermore, the English court had decided that a section 66 judgment should be entered and, because the Regulation did not apply to arbitration, it was irrelevant that its jurisdictional allocations would have prevented the court from hearing the claims in the Spanish proceedings. There was, therefore, an issue estoppel to the effect that the jurisdiction-allocation provisions of the Regulation were no good reason for the English section 66 judgment not to have been entered. The court should give effect to that issue estoppel, notwithstanding the judgment of the CJEU (paras 183, 203, 206, 209–210, 214, 216, 233, 236, 239, 314).
(5) Although res judicata had historically operated by way of an estoppel, it represented a rule of substantive law that was concerned with the prevention of duplicative litigation and the abuse of the process of the court and ensuring legal certainty. Those objectives were, as far as the English legal order was concerned, matters of public policy. Moreover, since it was a rule of law that was essential to the legal order of England and Wales, it was a relevant public policy for the purposes of article 34(1). The case law of the CJEU established that where the issue was whether a foreign judgment was compatible with a national judgment, the issue had to be dealt with within the exception for irreconcilable judgments in article 34(3) rather than the public policy exception in article 34(1). But article 34(3) only embraced decisions given by courts or tribunals of the justice system of the state and did not extend to awards in consensual arbitrations. Accordingly, the court could, by application of article 34(1), refuse to permit enforcement of a foreign judgment which was inconsistent with an existing arbitration award where the award was on the merits and had created a res judicata between the parties (paras 266, 268, 270, 276, 290, 292).
(6) Spain’s application for permission granted and appeal allowed in part. There was no reason why there should not be a monetary remedy for breach of an equitable obligation that was, as in the present case, equivalent to a contractual obligation. The recognition of the availability of equitable compensation in such a case was a sensible incremental development of the law. But, the restriction in section 13(2) of the State Immunity Act 1978 as to the power of a court to grant an injunction against a sovereign state also applied to arbitrators. Accordingly, Spain having not provided its written consent, the arbitrator had had no power to grant an injunction against it, or damages in lieu (paras 319, 320, 336–337, 342, 346–347, 361, 365, 367, 368).
Christopher Hancock KC, Thomas De La Mare KC, Charlotte Tan and Alexander Thompson (instructed by Wikborg Rein LLP) for the insurer.
Timothy Young KC and Jamie Hamblen (instructed by Squire Patton Boggs (UK) LLP) for Spain.