CJEU gives precedence to Spanish court judgment over English Commercial Court judgment enforcing arbitral award

On 20 June 2022, the Court of Justice of the European Union (“CJEU”) delivered a “preliminary ruling”[1] that an English Commercial Court judgment[2] enforcing an arbitral award (the “English judgment”) could preclude the recognition of a Spanish court judgment between the same parties and in relation to the same subject matter (the “Spanish judgment”). The preliminary ruling was decided by reference to the Brussels Regulation 2001 (the “Regulation”). However, the CJEU recognised an exception, namely, that if the English arbitral judgment infringed fundamental objectives and principles of the Regulation, then the recognition of the Spanish judgment could not be denied. The case related to the sinking of the M/T Prestige and the resulting oil spill off the coast of Galicia. The CJEU ruled that the English judgment fell within the exception. There remains a reference pending before the UK Supreme Court on whether the reference to CJEU itself was made correctly. We will deal with that reference when the Supreme Court rules on that reference. However, in the meantime the preliminary ruling has some implications for the enforcement of arbitration awards in the UK.

Background

The M/T Prestige sank off the coast of Galicia in November 2002. Following the sinking and the resulting oil spill the owners of the vessel (the “Owners”) made a claim under their protection and indemnity insurance. That insurance was with the London Steam-Ship Owners’ Mutual Insurance Association Ltd (the “Club”). The insurance cover included liability for pollution, subject to a cap of USD 1 billion. The insurance contract provided for any dispute to be resolved by arbitration seated in London. However, the Kingdom of Spain (the “State”) initiated criminal proceedings against M/T Prestige’s officers and the Owners in relation to the oil spill. The State also commenced civil proceedings against the Owners and the Club, before the Audiencia Provincial de La Coruña (provincial court of A Coruña).

The Club did not join the Spanish proceedings, but instead, initiated arbitration against the Owners. The State was invited to join the arbitration but declined to do so. An arbitral award was issued on 13 February 2013, finding that: firstly, the insurance contract was governed by English law and secondly, the State would not be entitled to receive a payment from the Club unless the terms of the insurance contract were complied with. This included the ‘pay to be paid’ clause which provided that unless the Owners first paid out damages to the State in relation to its liability, the Club would not be liable to the State.

The Club applied to the Commercial Court under s 66 of the Arbitration Act 1996 requesting a judgment enforcing the arbitral award. The State contended that the tribunal lacked jurisdiction. On 22 October 2013, the Commercial Court ruled in favour of the Club. The State appealed to the Court of Appeal; that appeal was dismissed in 2015 ([2015] 2 Lloyd’s Rep 33).

In the meantime, the Spanish proceedings were continuing and on 15 November 2017, the Spanish provincial court ruled in favour of the State (and other parties) finding the Owners and the Club liable in the amount of circa EUR 1.6 billion. The Club’s liability was limited to the capped sum of USD 1 billion. The Spanish supreme court confirmed the order on appeal. Under the Spanish criminal code, the courts held that the insurers could be found liable directly for events resulting out of certain offences, including negligence against the environment. M/T Prestige’s officers had been convicted in respect of that offence, allowing a direct action against the Club. This direct liability functioned irrespective of the ‘pay to be paid’ clause. On 1 March 2019, the Spanish provincial court granted the Spanish Judgment in favour of the State.

The State approached the English Commercial Court for recognition of the Spanish judgment under the Regulation. The Club argued against recognition, contending that the Spanish judgment could not be reconciled with the English judgment, as both had decided the same issues between the same parties.

Reference to the CJEU (the “Reference”)

On 22 December 2020, shortly before the end of the Brexit transition period, the court referred the matter to the CJEU for a “preliminary ruling” on two principal questions:

1. Is the English judgment a “judgment” under art 34(3) of the Regulation?
2. In the alternative, can English courts refuse recognition of the Spanish judgment, if recognition would be contrary to public policy on the grounds that it would violate the principle of res judicata?

Advocate General’s opinion

Advocate General AM Collins (the “AG”) delivered his opinion on 5 May 2022.

(a) Is the English judgment a “judgment” under art 34(3) of the Regulation?

The AG answered this question in the affirmative (despite arbitration being excluded from the Regulation’s scope (art 1(2)(d))), giving two reasons:

1. the definition of “judgment” in the Regulation was very broad; and
2. the CJEU had itself decided that a “judgment” is a judicial decision deciding on its own authority on the issues between the parties (Solo Kleinmotoren GmbH v Emilio Boch (C-414/92) [1994] ILPr 457). The English judgment satisfied this criterion, because the Commercial Court had heard arguments and decided on substantive issues, such as the tribunal’s jurisdiction, public policy issues, and whether it was in the interests of justice to enter a judgment. Additionally, the jurisdiction to enforce an arbitral award did not emanate out of the arbitration agreement, but instead, like s 66 of the Arbitration Act, it was statutory in nature.

(b) In the alternative, can English courts refuse recognition of the Spanish judgment, if recognition would be contrary to public policy on the grounds that it would violate the principle of res judicata?

As the first question was answered in the affirmative, the AG argued that it was not necessary to answer the second alternative question. Nonetheless, for the sake of completeness, the AG answered it; in the negative. The Regulation was aimed at facilitating recognition of judgments and therefore, public policy bars should be narrowly construed. In relation to res judicata, the grounds for non-recognition themselves ensured that the principle was enforced. Thus, if a situation failed those grounds, a domestic court should not be allowed to invoke it separately to block recognition.

In the meantime, whilst the Reference was pending before the CJEU, the order requesting the reference was itself challenged in the Court of Appeal. The Court of Appeal held that the reference had been incorrectly made ([2022] 4 WLR 39). An appeal to the UK Supreme Court is yet to be heard.

CJEU ruling of 20 June 2022

The CJEU’s preliminary ruling re-emphasises the exclusion of arbitration from the Regulation’s ambit. In the CJEU’s opinion, it follows that the English judgment does not enjoy the same status as other judgments, such as a substantive English court judgment. Notwithstanding this, the CJEU confirms that the English judgment should be considered a “judgment” under the Regulation. The reasons given by the CJEU are similar to those stated in the AG’s opinion. However, in addition, the CJEU states that the fundamental principles and objectives of the Regulation must also be satisfied.

However, the CJEU has opined that the English judgment was delivered contrary to the fundamental principles and objectives of the Regulation. These principles include the free movement of judgments, predictability, certainty, minimisation of concurrent proceedings, and mutual trust in administration of justice. The CJEU has held that mutual trust in judicial administration does not extend to arbitral awards or judgments enforcing arbitral awards. Therefore, judgments enforcing arbitral awards can only preclude other judgments from being recognised, if they do not violate the right to an effective remedy provided under art 47 of the Charter of Fundamental Rights of the European Union.

In the CJEU’s opinion, the English judgment fails to ensure effective remedy for two reasons:

1. The arbitration clause between the Club and the Owners could not have been invoked against a victim of the insured damage, who was permitted to sue in tort or otherwise at the place where the damage occurred (Assens Havn v Navigators Management (UK) Ltd (C-368/16) [2018] 2 WLR 250); and
2. Civil proceedings were already pending in Spain, between the Club and the State among others before arbitration commenced between the Club and the Owners, The Club could not have initiated separate proceedings to seek a declaration that it was not liable (Nipponkoa Insurance Co (Europe) Ltd v Inter-Zuid Transport BV (C-452/12) [2014] 1 All ER (Comm) 288).

As minimisation of concurrent proceedings is a fundamental principle of judicial cooperation, the courts dealing with the award should have ideally verified whether their judgments would comply with the Regulation or referred the question to the CJEU. In the circumstances, the English judgment should not preclude recognition of the Spanish judgment. On the second question, the court agreed with the AG.

Comment

The CJEU’s decision indicates that domestic civil court judgments will be given precedence over judgments enforcing arbitral awards. However, this has two limitations:

1. Firstly, it only applies to domestic awards. The Regulation recognises that it does not affect the application of the various conventions that provide for recognition of foreign awards (art 69). The 2015 Recast Regulation carves out an exception for the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (art 73(2)). The CJEU opinion therefore implicitly differentiates between domestic and foreign awards, and only precludes enforcement of the former if they violate the fundamental principles and objectives of the Regulation. If the English judgment was in terms of a foreign award, the Regulation would not have been applicable. The AG’s opinion had pointed out this possibility, but the CJEU did not directly deal with it.
2. Secondly, the ruling applies only to pre-Brexit transition awards. This is contingent on the UK Supreme Court’s determination on whether the commercial court was correct in referring the questions to the CJEU. Perhaps, in addition to that decision, the UK Supreme Court will have an opportunity to consider the implications of the possible different treatment of domestic and foreign awards.

On 28 June 2022, the Commercial Court ruled on a similar claim. In UK P&I Club NV v Venezuela ([2022] EWHC 1655 (Comm)), the court held that the Venezuelan government was ordinarily bound to arbitrate a civil claim against a vessel’s insurers. However, given that a Venezuelan navy patrol vessel was damaged in the incident, Venezuela was entitled to sovereign immunity from an anti-suit injunction. Although the situation was similar in both cases, with a state seeking damages against a vessel’s insurers, the different result highlights that arbitrating maritime civil damages remains a complex matter.

Article co-authored by Karan Kamath, Intern at CMS.

[1] Case C-700/20.

[2]London Steam-Ship Owners’ Mutual Insurance Association Ltd v Spain [2014] 1 Lloyd’s Rep 309.