English Court of Appeal confirms loss of state immunity when pursuing commercial contractual claims

Where the insurance contract contained an arbitration clause, a third party (ie the state) claiming a right under the contract took that right subject to the arbitration clause. Consequently, the state could not claim immunity from proceedings against it to enforce an arbitral award (and court judgment in terms of the award) which concerned the same commercial transaction and the obligation of the state to bring any such monetary compensation claims in arbitration. Under SIA 1978, s 9 the state was not immune to court proceedings related to the arbitration. The Court of Appeal also rejected appeals by the insurer and held that a declaratory arbitration award was not capable of creating an obligation, breach of which gave rise to a cause of action for damages. Written by Nicholas Peacock, partner and Prashant Kukadia, associate at Bird & Bird LLP, London.

London Steam-Ship Owners’ Mutual Insurance Association Ltd v Kingdom of Spain; London Steam-Ship Owners’ Mutual Insurance Association Ltd v French State [2021] EWCA Civ 1589

What are the practical implications of this case?

When looking at whether a state would be afforded immunity by virtue of the SIA 1978—and so considering whether the exceptions under SIA 1978, s 3 apply, the English courts will analyse whether the underlying transaction or activity entered into by the state is ‘commercial’. Seeking monetary compensation by virtue of a commercial insurance contract will be viewed as commercial. Accordingly, pursuant to the exception in SIA 1978, s 3, the state will not be immune from proceedings that relate to its claim for compensation.

It will not matter whether the state’s claims are asserted in ‘judicial’ proceedings or otherwise:

‘The fact that claims are being heard by a judicial authority does not make the claims judicial in character, activity seeking monetary compensation by virtue of a commercial contract against the consequences of a commercial misadventure is plainly commercial in character.’

SIA 1978, s 9 will also be relevant. A state which has agreed in writing to arbitration (including by asserting rights under a contract which is subject to an agreement to arbitrate) is not immune as respects proceedings which relate to the arbitration. Where the arbitration relates to a ‘commercial transaction’ (as may often be the case) there may be overlap between SIA 1978, ss 3 and 9.

States, and other parties to insurance contracts, should therefore be mindful that a state which makes claims under an insurance contract will in doing so most likely forfeit its ability to claim state immunity in the UK courts for proceedings which relate to that insurance claim, including arbitration proceedings under the insurance contract.

The Court of Appeal’s decision also confirms the limits of a declaratory award: the English courts will not entertain a claim for breach of an obligation to honour such an award. It noted that a declaratory award or judgment did not create new obligations or extinguish existing obligations, but merely declared what those existing obligations were. To hold otherwise, it said, would be inconsistent with the nature of a declaration and, in the case of a state defendant, could amount to an injunction by the back door, contrary to SIA 1978, s 13(2).

What was the background?

On 19 November 2002, the MT Prestige, a tanker carrying fuel oil, broke into two and sank off Cape Finisterre. The fuel oil polluted the Atlantic coastlines of northern Spain and southern France, causing catastrophic damage to the marine environment and to the livelihoods of people who lived there.

Proceedings were consequently brought in the Spanish courts by Spain and France (the ‘States’) and in the English courts by the shipowner’s liability insurer, the London Steam-Ship Owners’ Mutual Insurance Association Ltd, the London P&I Club (the ‘Club’).

The States sought compensation for losses caused by the pollution to their coastlines. They secured a final judgment from the Spanish courts against the Club (which order is being challenged by the Club).

The Club’s position was that the States’ pursuit of proceedings in the Spanish courts was contrary to an obligation for the States to pursue their claims in arbitration in London. The Club secured a declaratory arbitration award in London (‘Award’) supporting that position and secured a judgment in the terms of the Award pursuant to section 66(2) of the Arbitration Act 1996 (AA 1996) from the English High Court (‘Judgment’).

The Club issued three further proceedings (which were the subject of the appeals in this judgment) seeking:

• declaratory relief and damages/compensation in arbitration in London as a result of the States’ continuance of the Spanish proceedings, as to which the Club sought a default appointment of an arbitrator from the English court pursuant to AA 1996, s 18
  
  
• damages/compensation from the English High Court for the States’ breach of their obligation to honour the Award (ie to arbitrate any disputes), and
  
  
• damages/compensation from the English High Court for the States’ breach of their obligation to honour the Judgment (as issued in the same terms as the Award)

The States contended, inter alia, that they were entitled to rely on state immunity in respect to all three further claims.

What did the court decide?

Broadly, state immunity relates to the protection given to a state from being sued in the courts of other states. The English law on state immunity is set out in SIA 1978. SIA 1978, s 3(1)(a) provides that a state is not immune in respect of proceedings relating to ‘a commercial transaction entered into by the State’. By SIA 1978, s 3(3)(c), a ‘commercial transaction’ includes any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a state enters or in which it engages otherwise than in the exercise of sovereign authority.

In this case the Court of Appeal held that the States attempt to enforce the terms of the insurance contract under an action in the Spanish courts amounted to a commercial transaction. The claims derived from a commercial contract of insurance by which the Club granted cover to the shipowner against the consequences of commercial maritime casualties. Just because the claim was advanced in judicial proceedings, it did not cease to be a commercial activity under SIA 1978. Claims in the English court which related to those underlying Spanish proceedings were also covered by the exception to immunity. This included claims to enforce the Award (and the Judgment) which concerned the States’ obligation to arbitrate dispute relating to the insurance cover:

‘The acts which form the basis of the claim, and to which the proceedings relate, are not merely the fact of the Awards or the Judgment which create obligations: they are the commercial and non-sovereign activity which is alleged to be a breach of those obligations.’

SIA 1978, s 9 provides that:

‘Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration.’

The Court of Appeal held that having agreed to resolve disputes in arbitration: ‘the scope of that agreement extends to a dispute about the consequences of not doing so if they were so bound’.

This analysis was first published on Lexis®PSL on 25/11/2021 and can be found here (subscription required).