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||Neutral Citation Number:  EWCA Civ 333
||Case Nos: A3/2013/3463 & 2013/3473
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Mr. Justice Hamblen
 EWHC 3188 (Comm)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||1st April 2015
B e f o r e :
LORD JUSTICE MOORE-BICK
Vice-President of the Court of Appeal, Civil Division
LORD JUSTICE PATTEN
LORD JUSTICE TOMLINSON
|| THE LONDON STEAMSHIP OWNERS' MUTUAL INSURANCE ASSOCIATION LTD
||- and -
||(1) THE KINGDOM OF SPAIN
(2) THE FRENCH STATE
(Transcript of the Handed Down Judgment of
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Mr. Joe Smouha Q.C. and Ms Anna Dilnot (instructed by K & L Gates LLP) for the appellants
Mr. Christopher Hancock Q.C. and Ms Charlotte Tan (instructed by Ince & Co LLP) for the respondent
Hearing dates : 20th – 22nd January 2015
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Moore-Bick :
- These proceedings arise indirectly out of the sinking of the vessel 'Prestige' off Cape Finisterre in November 2002. The vessel was carrying 70,000 tonnes of fuel oil, which escaped and polluted the Atlantic coastline of northern Spain and southern France when the vessel broke up. The resulting damage was very extensive and the costs of cleaning up far exceeded the amount of the owners' liability under the International Convention on Civil Liability for Oil Pollution Damage ("CLC"), in respect of which they were compulsorily insured.
- The facts giving rise to the proceedings are described fully in the judgment of Hamblen J., from which the following summary is largely drawn. In late 2002 criminal proceedings were instituted in Spain against the master, chief officer and chief engineer and in 2010, at the conclusion of the investigatory stage, claims were brought by several Spanish legal entities, including the State Administration of Spain ("Spain"), against the vessel's owners on the grounds that they were vicariously liable for the acts of the master. At about the same time the French authorities ("France") joined the proceedings making similar claims. All those claims were made under provisions of the Spanish Penal Code which enable a person who has suffered injury as a result of a criminal offence to recover damages in the criminal proceedings in respect of his loss.
- In those proceedings Spain and France also made claims against the owners' protection and indemnity insurers, The London Steamship Owners' Mutual Insurance Association Limited ("the Club"), under Article 117 of the Spanish Penal Code which enables an injured party to pursue a direct claim against the defendant's insurer. Those claims were based both on the Club's obligation to indemnify the owners against their CLC liability and on its obligation to indemnify them against their independent liability for the tortious acts of the master, chief officer and chief engineer.
- The CLC itself provides for direct action against insurers in respect of their obligations to indemnify owners in respect of their liability under it and accordingly the Club acknowledged its liability to Spain and France in that respect. However, in relation to the other heads of claim it maintained that they were bound by the contract contained in the Club rules, which provided that it was to be governed by English law and that disputes were to be referred to arbitration. The rules also contained a "pay to be paid" clause (see The 'Fanti' and the 'Padre Island'  2 A.C. 1) and the Club maintained that on the true construction of that clause it was under no liability to the claimants.
- The Club played no part in the Spanish proceedings. It did, however, commence arbitration in London seeking declarations that Spain and France were bound by the arbitration clause in its rules and that it was not liable under the contract. The references proceeded separately, but the same arbitrator, Mr. Alistair Schaff Q.C., was appointed in each case. Neither Spain nor France agreed to the appointment of an arbitrator and it was therefore necessary for the Club in each case to obtain an order from the court pursuant to s.18 of the Arbitration Act 1996 in order to constitute the tribunal. In due course the arbitrator published awards granting the declarations which the Club sought.
- The Club then applied under section 66 of the Arbitration Act 1996 for permission to enforce the awards as judgments of the High Court. Spain and France opposed those applications on the grounds that as states they were immune from proceedings by reason of the State Immunity Act 1978. However, in the course of those proceedings they themselves issued application notices seeking declarations under sections 67 and 72 of the Arbitration Act that the awards had been made without jurisdiction. The grounds on which they sought that relief were that the rights they sought to enforce against the Club arose under Spanish law independently of the contract of insurance. They also contended that the claims were by their nature not susceptible to arbitration.
- The Club's purposes in taking proceedings in this country were twofold: first, it wished to establish by what it considered to be the proper process that any liability it might have to Spain or France was subject to the terms of the contract as contained in the rules, i.e., that it was subject to the "pay to be paid" clause and could be enforced only by arbitration; secondly, it wished to obtain a judgment in this country before judgment was delivered in the Spanish proceedings so that, if any attempt were made to enforce a Spanish judgment against it in this country, it could rely on article 34(3) of the Judgments Regulation. In the event, the Spanish proceedings did not result in the conviction of any member of the vessel's crew of an offence which gave rise to a liability enforceable against the Club. However, an appeal is pending, the outcome of which might be different.
B. The decision below
- The proceedings before Hamblen J. occupied seven days, in the course of which the judge heard evidence from expert witnesses on Spanish law. He held:
(i) that the claims being made by Spain and France against the Club were to be characterised in English law as claims to enforce English law obligations rather than independent Spanish statutory rights, and that those obligations could be enforced only in accordance with their terms – i.e. in arbitration and subject to the "pay to be paid" clause;
(ii) that Spain and France had become parties to the arbitration agreement in the Club rules and were therefore not entitled to state immunity by virtue of section 9(1) of the State Immunity Act 1978;
(iii) that the claims were arbitrable; and
(iv) that it was appropriate in the exercise of his discretion to give permission to enforce the awards as judgments, because there was a real possibility that the resulting judgments would fall within article 34(3) of the Judgments Regulation and would prevent enforcement of any Spanish judgment in this country or elsewhere in Europe.
He therefore dismissed the applications of Spain and France for declarations that the awards had been made without jurisdiction and gave permission to the Club to enforce them as judgments.
- This is the appeal of Spain and France against the judge's orders. The judge gave permission to appeal in respect of his decisions on characterisation, state immunity and enforcement. He refused permission to appeal in respect of his decision on arbitrability, in respect of which the appellants sought permission from this court. In the event, the appellants abandoned their challenge to the exercise of the judge's discretion, with the result that only three of the four issues just mentioned arise for consideration on this appeal.
- As became apparent in the course of argument, the question of characterisation is closely linked to that of state immunity. Mr. Smouha Q.C. for the appellants preferred to address state immunity first, but I find it more convenient to begin with characterisation.
- Characterisation forms part of the English conflict of laws rules and is the means whereby the court identifies the system of law by reference to which a particular issue between the parties is to be determined. For this purpose it is important to distinguish between claims and issues, since a single claim may give rise to several issues, not all of which are to be determined by reference to the same system of law. This point was emphasised by Auld L.J. in Macmillan Ltd v Bishopsgate Investment Trust Plc (No. 3)  1 WLR 387, when he said at page 407B-C:
"Subject to what I shall say in a moment, characterisation or classification is governed by the lex fori. But characterisation or classification of what? It follows from what I have said that the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence."
- In a similar vein Aldous L.J. said at page 418A-B:
"I agree with the judge when he said  1 W.L.R. 978, 988: "In order to ascertain the applicable law under English conflict of laws, it is not sufficient to characterise the nature of the claim: it is necessary to identify the question at issue." Any claim, whether it be a claim that can be characterised as restitutionary or otherwise, may involve a number of issues which may have to be decided according to different systems of law. Thus it is necessary for the court to look at each issue and to decide the appropriate law to apply to the resolution of that dispute."
- Questions very similar to those which arise in the present case arose in Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Co. Ltd  EWHC 3158 (Comm),  1 Lloyd's Rep. 206. In paragraph 16 of my judgment in that case I said in a passage subsequently approved by this court:
"16. The issue in the present case is whether New India is bound by the arbitration clause which in turn depends on whether it is seeking to enforce a contractual obligation derived from the contract of insurance or an independent right of recovery arising under the Insurance Contracts Act. If in substance the claim is independent of the contract of insurance and arises under the Finnish legislation simply as a result of its having a right of action against an insolvent insured, the issue would have to be characterised as one of statutory entitlement to which there may be no direct equivalent in English law. In that case the issue would in my view have to be determined in accordance with Finnish law. If, on the other hand, the claim is in substance one to enforce against the insurer the contract made by the insolvent insured, the issue is to be characterised as one of obligation. In that case the court will resolve it by applying English law because the proper law of the contract creating the obligation is English law: see Adams v National Bank of Greece."
- As in Through Transport, the issue in the present case is whether the appellants are bound by the terms of the Club's rules, in particular the arbitration clause and the "pay to be paid" clause which depends on ascertaining the nature of the right which the appellants seek to enforce. Two possibilities present themselves: a right to enforce an obligation defined by the contract of insurance and an independent statutory right created by Spanish legislation and independent of the contract. The judge held that it was the former. The essence of his reasoning is to be found in paragraphs 87-89 of his judgment where he said:
"87. In all these cases both the law creating the right of direct action and the existence and validity of the contract made subject to the direct action will be essential pre-requisites of the third party's right. Both are necessary to the existence of that right. In my judgment, in deciding whether or not the direct action right is "in substance" a claim to enforce the contract or a claim to enforce an independent right of recovery, what is likely to matter most is the content of the right rather than the derivation of that content. It is the content of the right which will be the most telling guide to what "in substance" that right is.
88. The essential content of the right is provided by the contract. Save for the Article 76 exceptions, the third party's right is as set out in and defined by the contract. It is the contract that must be looked to in order to determine whether there is any right to recover from the insurer and, if so, on what basis and with what limitations. In many cases the contract is all that will need to be considered. In the present case, for example, there is no suggestion of wilful misconduct by the assured or of "personal" defences arising. In those circumstances the third party's rights will be determined solely by reference to and by the contract.
89. Whilst it is correct that the source of the right is the law rather than the contract that will always be the case where there is a right of direct action. By definition the third party is not a party to the contract so that his right will have to arise elsewhere, almost invariably under a direct action statute. Because the right is one which is created by law/statute it will also be the law/statute which defines the content of the right even if, as here, it does so by reference to the contract. The law/statute will usually also set out anti-avoidance provisions or other limitations on the insurer's contractual rights. The key features which are relied upon by the Defendants are therefore features that are likely to be present in most direct action cases. In Through Transport, for example, the direct action right was created by the Finnish Act; it was the Finnish Act which determined that the right was to be one to claim compensation in accordance with the contract, and it was the Finnish Act which rendered void any contractual provisions which derogated from the protection provided under it. It was nevertheless held to be in substance a right to enforce the contract."
- This approach was subsequently accepted as correct and applied by Teare J. in Shipowners' Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat Ve Ticaret A.S. (The 'Yusuf Cepnioglu')  EWHC 258 (Comm), to which our attention was drawn after the conclusion of the argument.
- Mr. Smouha submitted, however, that the judge's analysis was flawed because he concentrated too much on the content of the liability imposed on the Club by Spanish law and too little on its source and essential nature. He ought to have paid closer regard to the provisions of Spanish law and the nature of the right to which they give rise. Had he done so, he would have concluded that in this case, unlike Through Transport, the right was an independent statutory right created by Spanish law and that its content was to be determined in accordance with Spanish law. Accordingly, if (which has not been determined) Spanish law would not give the same effect to the "pay to be paid" clause as English law, it would not operate to defeat the appellants' claim. In response Mr. Hancock Q.C. submitted that the judge was right to have regard primarily to the content of the liability which the appellants are seeking to enforce. He submitted that, since Spanish law accepts that (subject to certain exceptions) the direct claim against the insurer reflects the terms of the contract of insurance, the distinction between the nature and content of the insurer's liability is essentially semantic. What matters is the content of that liability.
(i) Spanish law
- The starting point of the enquiry must be the terms of the Spanish legislation. The judge heard evidence from Spanish lawyers and made a number of findings which, since they are not the subject of any appeal, must be accepted in full. He set out his findings about the legislative background in paragraphs 59-63 of his judgment. Of particular importance are Article 76 of the 1980 Insurance Contract Act and Articles 109, 116 and 117 of the Penal Code.
- Article 76 of the 1980 Act, which is concerned with the right to bring a direct action against a civil liability insurer, provides (in translation) as follows:
"The injured or aggrieved party or their heirs shall be entitled to a direct action against the insurer to demand of him the fulfilment of the obligation to compensate, without prejudice to the insurer's right to recover from the insured in the event that the damage or injury to the third-party was caused by the wilful misconduct of the insured. Direct action shall be exempt from the defences that the insurer may have had in respect of the insured. The insurer may, however, allege that the injured party is exclusively liable and may also raise the personal defences he may have in respect of the injured party. For the purposes of bringing direct action, the insured shall be obliged to inform the injured third party or their heirs of the existence of an insurance contract and the content of the same".
- Articles 109, 116 and 117 of the Penal Code are concerned with civil claims in criminal proceedings. They provide as follows:
Perpetration of an act defined as a felony or misdemeanour by Law shall entail, pursuant to the provisions contained in the laws, repairing the damages and losses caused thereby.
In all cases, the party damaged may opt to sue for civil liability before the Civil Jurisdiction.
1. All persons held criminally accountable for a felony or misdemeanour shall also be held liable under Civil Law if the fact gives rise to damages or losses. If two or more persons are responsible for a felony or misdemeanour, the Judges or Courts of Law shall set the proportion for which each one must be held accountable . . .
Insurers that have underwritten the risk of monetary liabilities arising from use or exploitation of any asset, company, industry or activity when as a consequence of a fact foreseen in this code, an event takes place covered by the risk insured, shall have direct civil liability up to the limit of the legally established or contractually agreed compensation, without prejudice to the right to bring an action for recovery against who such may be appropriate."
- The judge found that the direct action contemplated by Article 117 has the same nature and is subject to the same legal regime as that contemplated by Article 76 of the 1980 Act.
- As one would expect, the legislation has been the subject of judicial exposition. In paragraph 65 the judge cited at length from a judgment of the Provincial Court of Madrid, which he found contained a correct exposition of Spanish law. It included the following:
"It should be emphasised that this direct action of the wronged third party against the insurer [sc. the right of direct action under Article 76] can be exercised both within civil and criminal jurisdictions (if the accident covered by the insurance has a criminal nature and the insured party is criminally liable).
II. In principle, for the direct action of the wronged third party against the insurer to be successful, it is essential that if it was exercised by the insured party against the insurer, that it was also successful. However this general rule has two clear exceptions in Article 76 of the Insurance Contract Law (LA LEY 1957/1980), in which, despite the fact that the insurer is not obligated to indemnify the insured party for the accident that occurred, nevertheless, it is obligated to indemnify a wronged third party when the direct action is exercised by them. Of course, in these two cases, the insurer is granted the right to a recovery action against the insured party in order to recover the amount of money with which the wronged third party was indemnified.
The first of these two exceptions is when the damage caused to the wronged third party is due to the malicious behaviour of the insured party….
The second of these two exceptions is when the insurer is obligated to pay the indemnity to the wronged third party because it is prevented from bringing up to challenge them, in their exercise of this direct action, any exception that it would have otherwise been able to bring up to challenge the insured party…
So, when faced with a wronged third party who exercises such direct action, the insurer can oppose all the "defences" that it deems convenient, and specifically, those referring to the lack of facts constituting the third party's right (which should be operative even when they have not been alleged by the insurer, if the Judge believes that these facts constituting the right of the claimant have not been proven, then the action that is being exercised would not have been brought about, and would be inexistent). These "defences" or exceptions in a broad sense are the following:
Inexistence of a civil liability insurance policy between the insurer and the insured party or the extinguishing of this contractual legal relationship.
The absence of the right of the wronged third party to compensation, due to the absence of one or more of the requirements necessary for the civil liability of the insured party to be relevant with respect to the wronged third party.
The right of the third party is outside the coverage of the insurance policy: the objective limits to the insurance policy's coverage will determine the substantial contents of the insurer's obligation, such that the right of the wronged third party will have been produced with respect to the insured party, but this is exclusively covered by the insurer against the creation of the obligation to indemnify for acts established in the policy the results of which are civilly liable; This is deduced from the formation of Article 76 of Law 50/1980, dated October 8, regarding Insurance Contracts (LA LEY 1957/1980) which follows precisely from the precept that said that the wronged party will have the ability to take "direct action against the insurer in order to demand from it compliance with the obligation to indemnify, within the limits established by applicable regulations, in the case of obligatory insurance, or due to the contract, in the case of voluntary insurance" (article 108 of the Draft Bill of 1969), a paragraph that was eliminated in the subsequent Draft Bill (Article 76 of the Draft Bill of 1970) because its contents were considered obvious, and therefore its declaration unnecessary. It is also deduced from the need for it to be related to the first sentence of Article 76, which grants the wronged third party or its inheritors the action to demand from the insurer compliance with its obligation to indemnify, with Article 1, which reduces the obligation to indemnify on the part of the insurer up to the "limits agreed upon", and with Article 73, which also adheres to this obligation, on the part of the insurer, to indemnify up to the "limits established in the Law and in the policy".
The insurance coverage comes to be contractually defined by the clauses delimiting the insured risk and by the limiting clauses of the right of the insured party to charge the indemnity produced by the accident, where both the former (those that delimit risk) and the latter (those limiting the rights of the insured party) can be challenged by the insurer, when faced by a wronged third party who exercised direct action.
- The judge found in paragraph 66 that:
" . . . the general rule and starting point is that the third party can only claim against the insurer if and to the extent that the assured would also have been able to claim against the insurer, subject to the specific exceptions laid down in Article 76 itself."
- Having considered the evidence of the experts relating to personal defences and to certain points of disagreement between them, he found in paragraph 82 that:
"In so far as it is necessary to make any findings as to whether the direct action right is an independent right as a matter of Spanish law, I find that it is independent in origin but not in content. It derives from the law rather than the contract, but it does not exist separately from the contract and its content reflects the contract, save for the Article 76 exceptions. If it is necessary to choose whether or not that means that it is an independent right I find that it is not, for the reasons given by Dr Ruiz Soroa, as outlined above."
(ii) The nature of the right against the insurer
- As the judge pointed out in paragraph 87, whenever legislation gives a third party a right to make a direct claim against an insurer by reference to the terms of the contract of insurance both the statutory and contractual rights are involved. The third party would have no right to claim against the insurer but for the right given him by statute, but the content of that right is defined largely, if not entirely, by the contract. It is for this reason that I find the distinction between the source of the claimant's right and the content of that right somewhat sterile. In some cases, of which Through Transport is an example, the terms of the legislation make it reasonably clear that the claimant is intended to be given a right to enforce the contract in place of the insured. In that case section 67 of the Finnish Insurance Contract Act 1994 provided that:
"A person who has sustained bodily injury, property damage or financial loss under general liability insurance is entitled to claim compensation in accordance with the insurance contract direct from the insurer if . . . the insured has been declared bankrupt or is otherwise insolvent." (Emphasis added.)
It was not difficult in that case to infer that the intention of the legislature was to enable claimants to enforce the contract of insurance against the insurer in place of the insured.
- In my view the critical question is what, in substance, was the nature of the right that the legislation was seeking to confer on the third party. Where a wrongdoer is insured against liability of some kind it will be possible to identify an insurer who may be held liable in his place, but, unless the legislation is intended to work in an arbitrary fashion, it will be necessary to establish that the contract covers the liability in question. That in turn means ascertaining the limits of the insurer's obligation, which also means that he should be able to raise any defences that would be available to him in an action brought by the insured. If the legislation conferring a direct right of action against the insurer recognises that in substance that is the case, it is difficult to resist the conclusion that its intention and effect is to enable the third party to enforce against the insurer the same obligations as those that could have been enforced by the insured himself. If, on the other hand, the legislation prevents the insurer from relying in defence of a claim on important provisions which define the scope of his liability, one may be driven to the conclusion that the legislation has created a new right which is not intended to mirror in substance the insurer's liability under the contract.
- In some cases it may not be easy to decide on which side of the line the case falls, but the court must ultimately determine whether the right conferred on the claimant is in substance one to enforce the obligation created by the contract of insurance or one to enforce a liability which is independent of the contract. In the former case the nature and scope of the obligation will be governed by the law under which it was created, in a case of this kind the proper law of the contract. In the latter it will be governed by the law of the country whose legislation created it. One useful indication may be the extent to which the law creating the right of direct action seeks to modify the scope of the obligation to which the contract would otherwise give rise. In the case of Articles 76 and 117, Spanish law recognises that the third party's right to claim against the insurer is to be determined by the terms of the contract, save for the exclusion of certain "personal defences" on what appear to be public policy grounds. The fact that the right to recover against the insurer is largely defined by the terms of the contract and that under Spanish law those relatively limited modifications to the contractual obligation are recognised both point to the conclusion that the effect of the legislation is in substance to enable the claimant to enforce the obligations arising under the contract of insurance.
- Mr. Smouha drew our attention to two matters which he said pointed to the conclusion that the liability of the insurer is treated as sounding in tort rather than contract and so as arising independently of the contract of insurance. The first concerns the judge's finding about the meaning of the first sentence of Article 76 of the 1980 Act, which provides that:
"The injured or aggrieved party or their heirs shall be entitled to a direct action against the insurer to demand of him the fulfilment of the obligation to compensate, . . ."
The judge found that "the obligation to compensate" refers to the insured's obligation to compensate the third party, so that the effect of Article 76 is to give the third party a right to recover from the insurer the compensation that he is entitled to recover from the insured wrongdoer.
- The second is the fact that the limitation period applicable to a claim under Articles 76 and 117 is the one-year period applicable to claims in tort rather than the two-year period applicable to claims under contracts of insurance.
- I do not think that either provides any real support for his argument. Whether the claim is treated by Spanish law as sounding in tort rather than contract is beside the point. What matters is the essential nature and scope of the right conferred by the legislation. If, as the judge has found, the legislation confers on the third party a right to recover damages from the insurer but only to the extent that the contract of insurance allows, it is necessary to look to the contract of insurance to determine the extent of that right. That is simply another way of saying that in substance the third party is given a right to enforce the contract against the insurer. Since that contract is governed by English law, it is necessary to turn to English law to determine the scope of the insurers' liability and the terms on which it may be enforced.
- It is important to remember that the court is concerned with the characterisation of issues rather than claims and that the relevant issues for present purposes are whether the Club's liability can be enforced only in arbitration and whether the "pay to be paid" clause operates to defeat a claim under the policy. Both questions relate to the content of the obligation. In my view, therefore, the judge was right to concentrate on the substance of the obligation, by which I understand him to have meant its scope and content. This case differs from Through Transport in as much as Article 76 of the 1980 Act is not couched in terms of enforcing the contract of insurance, but on the judge's findings it seems to me that that is what in substance it entails and there is a clear finding that Article 117 of the Penal Code has the same effect. For these reasons I have reached the conclusion that the issues relating to the appellants' right to seek compensation from the Club are to be characterised as issues relating to an obligation sounding in contract and that as such they are to be determined in accordance with English law as the proper law of the obligation. It follows that, in the application of English law, if the appellants wish to pursue claims against the Club they must do so in arbitration in accordance with the terms of the contract of insurance and subject to the "pay to be paid" clause.
D. State immunity
- Mr. Smouha submitted that the appellants, as sovereign states, were not subject to the jurisdiction of the English courts unless it could be shown they had brought themselves within the scope of one of the exceptions set out in sections 2-11 of the State Immunity Act 1978: see section 1. The judge held, following my decision in Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Co. Ltd (No. 2)  EWHC 455 (Comm),  2 Lloyd's Rep. 378, that the appellants had become parties to the arbitration agreement as a result of making a claim against the Club in the Spanish proceedings, but Mr. Smouha submitted that his decision was wrong, because the requirement of section 9(1) of the State Immunity Act for an agreement in writing can be satisfied only by a written manifestation, authenticated by an authorised signatory, of the state's consent to refer the relevant dispute to arbitration. No such agreement had been made in this case. In response to the Club's contention that the appellants had submitted to the jurisdiction in the manner contemplated by sections 2(3) (instituting or taking a step in the proceedings) and 3(1)(b) (becoming parties to an obligation which falls to be performed in the United Kingdom) he submitted that neither appellant had instituted or taken a step in any proceedings of a kind that was consistent with an election to waive its right to immunity.
- Mr. Hancock accepted that the starting point for the purposes of any discussion of state immunity was section 1 of the State Immunity Act 1978, which provides that a state is immune from the jurisdiction of the courts of the United Kingdom except as provided in Part I of the Act. He submitted, however, that neither appellant was entitled to immunity in respect of the proceedings under section 66 of the Arbitration Act 1996 because both had agreed in writing within the meaning of section 9(1) of the State Immunity Act to submit to arbitration the dispute relating to the arbitrator's jurisdiction and the Club's liability. He also submitted that proceedings under section 66 of the Arbitration Act related to an obligation which by virtue of a contract fell to be performed in the United Kingdom within the meaning of section 3(1)(b) of the State Immunity Act and that in any event, by seeking relief under sections 67 and 72 of the Arbitration Act, each of the appellants had instituted their own proceedings or had taken a step in the Club's proceedings and were therefore to be deemed to have submitted to the jurisdiction under section 2(3) of the State Immunity Act.
(i) A step in the proceedings
- It is convenient to begin by considering the third of those questions, which in my view yields a clear answer to this limb of the appeal. Section 2 of the State Immunity Act provides, so far as material, as follows:
"(3) A State is deemed to have submitted—
(a) if it has instituted the proceedings; or
(b) subject to subsections (4) and (5) below, if it has intervened or taken any step in the proceedings.
(4) Subsection (3)(b) above does not apply to intervention or any step taken for the purpose only of—
(a) claiming immunity; . . . "
- In Kuwait Airways v Iraqi Airways  1 Lloyd's Rep 25 this court considered what constitutes a step in the proceedings for the purposes of section 2(3)(b). All three members of the court held that it is a step of a kind which evidences an unequivocal election to waive immunity and allow the court to determine the claim on its merits: see per Nourse L.J. at page 32, col. 1, Leggatt L.J. at page 34, col. 1 and Simon Brown L.J. at pages 37, col. 2 to 38, col. 1.
- Mr. Hancock submitted that by their conduct both appellants had demonstrated their willingness for the English court to assume jurisdiction over them for the purposes of determining the Club's application. In the case of Spain, the failure to challenge the court's jurisdiction in accordance with CPR Part 11 following the filing of an acknowledgment of service amounted to a submission to the jurisdiction in accordance with rule 11(5): see Maple Leaf Macro Volatility Master Fund v Rouvroy  EWHC 257 (Comm),  1 Lloyd's Rep 475. In the case of France, the failure to file an acknowledgment of service or to challenge the court's jurisdiction amounted to a submission to the jurisdiction. Moreover, both appellants had filed evidence contesting the Club's applications on their merits and both had initiated proceedings seeking relief under sections 67 and 72 of the Arbitration Act 1996.
- Mr. Smouha submitted that CPR Part 11 does not apply to states that wish to claim immunity under the State Immunity Act. In this case both appellants made it clear at the outset that they did not submit to the jurisdiction and wished to claim immunity. That, he said, was sufficient to preserve their right to do so, since a state does not lose its right to immunity simply because it also contests the proceedings on the merits. The proceedings under section 67 and 72 were to be regarded as merely consequential on the position taken in response to the Club's application.
- CPR Part 11 is entitled "Procedure for disputing the court's jurisdiction" and provides, so far as material, as follows:
"(1) A defendant who wishes to –
(a) dispute the court's jurisdiction to try the claim; or
(b) argue that the court should not exercise its jurisdiction
may apply to the court for an order declaring that it has no such jurisdiction or should not exercise any jurisdiction which it may have.
(2) A defendant who wishes to make such an application must first file an acknowledgment of service in accordance with Part 10.
(3) A defendant who files an acknowledgment of service does not, by doing so, lose any right that he may have to dispute the court's jurisdiction.
(4) An application under this rule must –
(a) be made within 14 days after filing an acknowledgment of service; and
(b) be supported by evidence.
(5) If the defendant —
(a) files an acknowledgment of service; and
(b) does not make such an application within the period specified in paragraph (4),
he is to be treated as having accepted that the court has jurisdiction to try the claim."
- The judge held that, whatever may be the position under English procedural law, a state will not be held to have taken a step in the proceedings for the purposes of section 2(3)(b) of the State Immunity Act unless it has acted in a positive way that is sufficient to constitute an election not to insist on immunity. He found that both Spain and France had made their positions clear and that neither had acted in such a way as to waive immunity.
- Although their positions are very similar, it is convenient to deal with the appellants separately.
- The award against Spain was published on 13th February 2013. On 14th March 2013 the Club issued proceedings under section 66 of the Arbitration Act, which it served on Spain pursuant to an order granted by Andrew Smith J. for service out of the jurisdiction. On 14th May 2013 Spain filed an acknowledgment of service in which it stated its intention to apply to set aside the order granting permission for service out of the jurisdiction and reserved all its rights. However, it did not complete the box headed "I intend to dispute the court's jurisdiction", nor did it make an application to set aside the order for service out or take any other practical steps to dispute the court's jurisdiction to hear the Club's application. Accordingly, although it made it clear that it contested the jurisdiction of the arbitrator, it did not state clearly that it disputed the jurisdiction of the court to determine that question. Indeed, were it not for the final sentence one would have understood that it was content for the court to deal with the question on its merits. However, the final sentence read as follows: "The defendant will rely on grounds of challenge available under the Arbitration Act 1996 and also under the Sovereign Immunity Act [sic] 1978." The sentence is a little opaque, but in my view it is sufficient to prevent the document being treated as an unequivocal election to submit to the jurisdiction.
- On 21st June 2013 the solicitors acting for Spain wrote to the Club indicating their intention to make an application to the court to dispute the jurisdiction, but in the event they failed to do so. In that letter they set out the grounds on which they said their client would be challenging the award, the first of which was in fact a claim to immunity under the State Immunity Act.
- On 28th June 2013 Spain applied for an extension of time within which to file evidence in response to the Club's application and to issue proceedings under sections 67 and 72 of the Arbitration Act seeking a declaration that the award had been made without jurisdiction. No application was made for an extension of time in which to dispute the court's jurisdiction. In his witness statement served in support of the application Spain's solicitor, Mr. Meredith, reserved the right "to raise any and all available arguments to resist recognition and enforcement of the award arising out of the State Immunity Act 1978", but did not state in terms that Spain intended to seek permission to make an application to dispute the court's jurisdiction. At the same time he dealt with the merits of the Club's application to enforce the award, asking the court in the exercise of its discretion not to grant the relief sought.
- On 5th August 2013 Spain issued an application for relief under sections 67 and 72 of the Arbitration Act and at the same time filed a second statement by Mr. Meredith opposing the Club's application under section 66 and supporting Spain's own application. Spain did not make any formal application to dispute the court's jurisdiction, but in his witness statement Mr. Meredith said "If it is correct that there was no valid arbitration agreement, [Spain is] immune from suit on the basis of the State Immunity Act 1978." The court was then invited to dismiss the Club's application on the merits.
- On the face of it, Spain's issue on 28th June 2013 of an arbitration claim form seeking extensions of time might be said to be a step in the proceedings, but since all that Spain was seeking at that stage was further time to challenge in one way or another the claim against it, I think it is difficult to regard it as amounting to an unequivocal election to allow the court to determine the issue on the merits. That is all the more so when viewed in the context of the reference to the State Immunity Act in the evidence filed in support of the application. I do not think it possible to treat any of these steps as steps in the proceedings taken otherwise than for the purpose of claiming immunity.
- Mr. Hancock submitted that it is for English procedural law to prescribe the means by which a state which has been served with proceedings can establish a claim to immunity under the Act. He argued that CPR Part 11 does that by requiring a defendant who wishes to challenge the jurisdiction of the court to file an acknowledgment of service and make the necessary application. A failure to do so will, he submitted, constitute a positive election to submit to the jurisdiction pursuant to rule 11(5). Support for that proposition can be found in State Immunity (Dickinson, Lindsay & Loonam), paragraph 4.081. Mr. Smouha submitted that CPR Part 11 does not apply to a claim to state immunity; there must be a step in the proceedings otherwise than for the sole purpose of claiming immunity, if it is to be lost.
- In my view it is obviously desirable that if a party wishes to challenge the jurisdiction of the court it should do so in an orderly way. It is also desirable that the rules of procedure should prescribe the manner in which challenges to the court's jurisdiction should be made, as Part 11 does. However, unlike the extra-territorial jurisdiction which the court exercises in accordance with Part 6 of the Rules and which is derived from generally recognised principles of private international law, state immunity rests on principles of consent derived from customary public international law now codified in the State Immunity Act 1978. Subject to the specific exceptions set out in sections 2-11 of that Act, the general rule is that a state is immune from proceedings, save to the extent that it has consented to the jurisdiction, either expressly or by taking a step in the proceedings of a kind that demonstrates an election to waive immunity. It is for this reason that merely filing an acknowledgment of service does not amount to a waiver of immunity. In those circumstances I do not think that a state which has filed an acknowledgment of service but has failed to take any action to challenge the jurisdiction of the court can be treated by virtue of rule 11(5) as having submitted to the jurisdiction. Contrary to Mr. Hancock's submission, it has not taken a "negative" step in the action of a kind that is inconsistent with an assertion of immunity. The situation in the present case is quite different from that which obtained in Maple Leaf v Rouvroy, which concerned only the submission of a private party to the jurisdiction for the purposes of the Judgments Regulation.
- That brings me to Mr. Hancock's submission that, whatever may be the position in relation to the Club's proceedings under section 66 of the Arbitration Act, Spain is not entitled to claim immunity in relation to the proceedings under sections 67 and 72, which it commenced itself. Moreover, having by that means waived immunity in relation to the determination of the arbitrator's jurisdiction, it waived immunity in relation to the determination by the court of the Club's application under section 66.
- The judge dealt with this issue briefly, holding that Spain's position throughout had been that it was disputing the jurisdiction of both the court and the arbitrator. A state is not entitled to claim immunity in relation to proceedings which it has itself commenced: section 2(3)(a) of the State Immunity Act; by doing so it has clearly consented to the court's determining the claim and so has elected to waive any right to immunity. It is true, as the judge said, that until it issued its application notice Spain had generally made it clear that it was reserving its position in relation to immunity. It can also be said that its application, apart from having been made in the proceedings brought by the Club rather than by way of separate originating process, was no more than a corollary of the stance it had taken in relation to those proceedings.
- If the application had been issued only for the purposes of claiming immunity, it would not have constituted a relevant step in the proceedings: see section 2(4)(a); but in fact by its application notice Spain sought a declaration that the arbitrator did not have substantive jurisdiction because there was no arbitration agreement between itself and the Club. The application notice, therefore, was directed to the substantive grounds for setting aside the award and had nothing to do with Spain's right to claim immunity from the jurisdiction of the court. Nonetheless, Mr. Smouha submitted that a state is entitled to resist enforcement at the same time as it claims immunity and that in this case Spain was forced by the compressed timetable sought by the Club to pursue its substantive objections to the Club's application concurrently with its claim to immunity in order to avoid being prevented from pursuing them at all.
- The decision in Kuwait Airways v Iraqi Airways makes it clear that section 2(4) of the Act is a relieving section, that is, it presupposes that the state has taken a step in the action: see per Nourse L.J. at page 31, col. 2. I accept that a state which wishes to claim immunity is not precluded from taking steps at the same time to resist enforcement, for example, by applying to set aside a default judgment, and that the acid test by which to determine whether it has taken a step in the proceedings otherwise than for the sole purpose of claiming immunity is whether it has acted in such a way as to demonstrate that it is willing to allow the court to determine the substance of the dispute. However, I do not think that it is enough in this case to say that Spain had made clear its intention to claim immunity; it is necessary to consider how it actually conducted itself in relation to the proceedings. The reference to state immunity in Mr. Meredith's witness statement did not make it clear that the only purpose of issuing the application under sections 67 and 72 was to claim immunity; indeed, it could hardly do so, given the nature of the relief sought. On the contrary, in the witness statement immunity was said to exist if there was no valid arbitration agreement. It is difficult to resist the conclusion, therefore, that Spain was positively inviting the court to determine whether the arbitrator had jurisdiction, which was the principal issue raised by the Club's application.
- I can well understand that Spain felt itself to be under pressure to agree to an early hearing and did not want to allow its argument on the arbitrator's jurisdiction to go by default, but in the light of the Club's request for expedition it had to decide what course to take. It chose to apply for relief under sections 67 and 72 of the Arbitration Act and in doing so it took a step in the proceedings otherwise than for the sole purpose of claiming immunity. It is therefore deemed to have submitted to the jurisdiction under section 2(3)(b) of the State Immunity Act.
- The Club's application to enforce the award against France was issued on 9th July 2013. It was served on 24th July 2013 pursuant to an order of Eder J. giving permission to serve out of the jurisdiction. On 13th August the solicitors acting for France wrote to the Club seeking its agreement to have the proceedings heard at the same time as those against Spain. The Club agreed. No acknowledgment of service was filed and no application was made to dispute the court's jurisdiction. On 19th August 2013 France issued an application in the Club's proceedings seeking relief under sections 67 and 72 of the Arbitration Act. Mr. Meredith's statement supporting the application was in substantially the same terms as that filed in support of the application made by Spain. For the reasons given in relation to Spain's application, I consider that the issue of the application notice constituted a step in the proceedings within the meaning of section 2(3)(b) of the State Immunity Act.
- For all these reasons I am satisfied that the appellants must be regarded as having submitted to the jurisdiction pursuant to section 2(3)(b) of the State Immunity Act 1978.
- This makes it unnecessary to decide whether the appellants have also submitted to the jurisdiction under either or both of sections 9(1) or 3(1)(b). However, since both questions were fully argued I propose to state my views on them.
(ii) Section 9(1) of the State Immunity Act
- Section 9(1) of the State Immunity Act 1978 provides as follows:
"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 judge held, applying the decision in Through Transport (No. 2), that when a person makes a claim under an insurance policy containing an arbitration clause he becomes a person claiming under or through a party to the arbitration agreement and thereby a "party" to the arbitration by virtue of section 82(2) of the Arbitration Act 1996. He recognised, however, that that was but the first step in the analysis and went on to consider whether that was sufficient to bring a state within the scope of section 9(1) of the State Immunity Act. He held that it was, in part because he could see no reason why the expression "agreement in writing" should mean different things in the two Acts and partly because, in his view, the purpose of section 9(1) was to ensure that a state which became bound to pursue a claim (if at all) by arbitration in London was bound to accept the supervisory jurisdiction of the English courts if it chose to pursue that claim. In his view that conclusion was reinforced by the decisions of Gross J. in Ministry of Trade of the Republic of Iraq and Anr v Tsavliris Salvage (International) Ltd (The 'Altair')  EWHC 612 (Comm),  2 Lloyd's Rep 90 and of Gloster J. and this court in Svenska Petroleum Exploration AB v Lithuania (No. 2)  EWHC 2437 (Comm),  1 Lloyd's Rep 181,  EWCA Civ 1529  QB 886.
- In Through Transport (No. 2) no question of state immunity arose, because the person seeking to make a claim against the Club was an Indian insurance company, New India Assurance Co. Ltd. The only question for decision was whether that company had become a party to the arbitration agreement for the purposes of an application to the court under section 18 of the Arbitration Act. Under section 18(2) any party to an arbitration agreement may apply to the court to exercise its power to appoint an arbitrator. The arbitration clause in the Club's rules provided that any difference or dispute should be referred to arbitration in London. I held that the assertion of a claim by New India and its rejection by the Club caused a dispute to arise and that, because New India was claiming to enforce the obligation contained in the contract of insurance, it was claiming "under or through" the insured. It therefore became a party to the arbitration agreement within the meaning of the Act and so amenable to the supervisory jurisdiction of the English courts.
- Mr. Hancock submitted that the same principles apply when a state seeks to enforce an obligation that is subject to an arbitration agreement. In principle that may be so, but it does not necessarily answer the question whether the state has agreed in writing to submit the dispute to arbitration within the meaning of section 9(1) of the State Immunity Act. Mr. Smouha submitted that section 9(1) should be interpreted in the context of customary international law, in which consent is the foundation of the submission by one state to the courts of another. For that purpose nothing less than express consent will do. In support of that submission he drew our attention to the Draft articles on Jurisdictional Immunities of States and Their Property, with commentaries ("Draft articles") adopted by the International Law Commission in 1991. He submitted that whatever else the appellants had done in this case, neither of them had entered into an agreement in writing to refer present or future disputes to arbitration.
- The Draft articles do not deal directly with the principles by which states become parties to arbitration agreements, but they do lend support to Mr. Smouha's submission that consent lies at the root of the submission by one state to the jurisdiction of the courts of another. Thus, Article 7, which is headed "Express consent to exercise of jurisdiction" states the proposition in negative terms as follows:
"1. A State cannot invoke immunity from jurisdiction in a proceeding before a court of another State with regard to a matter or case if it has expressly consented to the exercise of jurisdiction by the court with regard to the matter or case:
(a) . . .
(b) in a written contract; . . . "
- The commentary states:
"(3) . . . The obligation to refrain from subjecting another State to its jurisdiction is not an absolute obligation. It is distinctly conditional upon the absence or lack of consent on the part of the State against which the exercise of jurisdiction is being sought.
(4) Consent, the absence of which has thus become an essential element of State immunity, is worthy of the closest attention . . . This unwillingness [sc. to submit to the jurisdiction] or absence of consent is generally assumed, unless the contrary is indicated. . . . There must be proof or evidence of consent to satisfy the exercise of existing jurisdiction or competence against another State."
- In relation to arbitration Article 17 provides as follows:
"If a State enters into an agreement in writing with a foreign natural or juridical person to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent in a proceeding which relates to:
(a) the validity or interpretation of the arbitration award;
(b) the arbitration procedure; . . . "
- It is true that in Belhaj v Straw  EWCA Civ 1394 the court was unwilling to accept the Draft Articles (which have yet to come into force) as a statement of customary international law, but the passages to which I have referred are illustrative of a basic principle that is widely accepted and were relied on by Mr. Smouha for no more than that. It is unnecessary to determine the extent to which they may be of assistance in resolving more difficult issues.
- A question similar to that which arises in this case arose for consideration in Svenska. In that case the government of Lithuania had signed an agreement between Svenska and a state-owned oil company for the exploitation of certain oil reserves under a rubric stating that it acknowledged itself to be bound as if it were a signatory. The agreement contained an ICC arbitration clause and a waiver of sovereign immunity. The government of Lithuania argued that it was generally recognised by tribunals dealing with international disputes that nothing less than express consent to the jurisdiction of the arbitrators was sufficient to hold a state a party to an arbitration agreement, a proposition which was said to reflect customary international law. In fact, however, the authorities on which it relied demonstrated little more than that a state will not be held to be a party to an arbitration agreement simply by virtue of the fact that it has put forward one of its own state organisations as a party to the contract.
- In Svenska the arbitrators had jurisdiction under the ICC rules to decide whether the government of Lithuania had agreed to refer the particular dispute to arbitration. They published an award holding that, by indicating its intention to be bound by the terms of the agreement, it had done so and the award was not open to challenge. This court held that that was sufficient to bring the case within section 9(1) of the State Immunity Act, but in that case the arbitration agreement was contained in a document which had been signed by the government of Lithuania in order to express its willingness to be bound by its terms. In the present case, by contrast, although there was an arbitration clause in the Club rules, those rules had not been signed or otherwise adopted in writing by either of the appellants. Insofar as they adopted the arbitration clause at all, they did so only by bringing proceedings in Spain to enforce against the Club an obligation which was subject to an arbitration clause.
- The questions for decision, therefore, are (a) whether the appellants consented to arbitration and (b) if so, whether it is sufficient to satisfy section 9(1) of the State Immunity Act that a state has consented to arbitration in accordance with terms recorded in writing. If it were not for the fact that the appellants had brought proceedings in Spain I do not think that they could be said to have consented to arbitration, since they did not become parties in the full sense to an arbitration agreement with the Club merely by acquiring a right under Spanish law to make a claim against it: see Through Transport  EWCA Civ 1598,  1 Lloyd's Rep 67 at paragraph 52.
- The appellants, of course, wish to enforce their claims against the Club without referring them to arbitration, but that is something they cannot do, for reasons I have already given. As a result of the assertion of those claims and the Club's rejection of them, a dispute has arisen which falls within the scope of the arbitration clause: see Through Transport (No. 2). Accordingly, for as long as the appellants continue to maintain their claims I do not think that they can be heard to say that they have not consented to arbitration or that the consent necessary for a submission to the jurisdiction of the English courts as the courts exercising supervisory jurisdiction over the arbitration is lacking.
- However, that still leaves the question whether the requirement in section 9(1) of the State Immunity Act for an agreement in writing can be satisfied by anything less than a document signed by or on behalf of the state. The judge held that it can. He thought that it would be surprising if, in a section dealing with agreements to arbitrate, Parliament had chosen to use words in a sense significantly different from that which they bear in the Arbitration Act. He derived some support for that conclusion from his understanding that the purpose of section 9 was to ensure that if a state has agreed to resolve disputes by arbitration it has rendered itself amenable to such process as may be necessary to render the arbitration effective. He could discern no indication in the State Immunity Act itself that states are to be treated differently from private parties for this purpose and he drew further support for his conclusion from the decisions in The 'Altair' and Svenska.
- Section 9(1) primarily contemplates at least that the state in question has made itself party in the full sense to an arbitration agreement expressed in writing. That was the position in both Svenska and The 'Altair', in each of which the state had, by different means, become bound as, or to the same extent as, a party to the contract. In Through Transport (No. 2) the question was whether New India was a "party to the arbitration agreement" within the meaning of section 18(2) of the Arbitration Act. Since "party" is defined in section 82(2) as including any person claiming under or through a party to the agreement, I held that New India was a party for the purpose of section 18, because, having made a claim against the insurer, it was claiming under or through the insured, Borneo Maritime Oy. As a member of the Through Transport club Borneo Maritime was a party to the arbitration agreement under which New India was bound to pursue its claim.
- Although in the present case the appellants must also pursue their claims by arbitration, they, like the claimant in Through Transport, are not parties to the arbitration agreement in the full sense. If they wish to pursue their claims they must do so in arbitration (see paragraphs 60 and 63 of the judgment of the Court of Appeal in Through Transport), but commencing proceedings in Spain did not involve a breach of an agreement to arbitrate (see paragraphs 65 and 95 of the same judgment). When the appellants began proceedings against the Club in Spain and the Club failed to concede the claim, disputes arose between themselves and the Club which were capable of being referred to arbitration and could only be validly determined in arbitration.
- In Through Transport (No. 2) I held that once a dispute or difference had arisen it could be referred to arbitration by either side. That is because the dispute had arisen out of an attempt to enforce an obligation that was itself qualified by, and subject to, the arbitration agreement. The position in the present case is substantially the same. The appellants sought to enforce a claim against the Club in proceedings in Spain and, if the Club had not taken steps to protect its position, they would, if successful, have obtained a judgment against it capable of being enforced in this country. Mr. Smouha submitted that the appellants could not, as a result of having issued proceedings in Spain, be treated as having agreed in writing to submit the dispute to arbitration, but the commencement of proceedings was for these purposes nothing more than the formal assertion of claims that were subject to arbitration agreements. At the time when the State Immunity Act was passed it was already accepted that the expression "arbitration agreement" in section 32 of the Arbitration Act 1950 (defined as an agreement in writing to submit to arbitration present or future differences) did not require the agreement to be signed (see Mustill & Boyd, Commercial Arbitration, 2nd ed. page 55), a position now reflected in section 5(2) of the Arbitration Act 1996. That being so, it would be surprising if Parliament had intended section 9(1) to apply only in cases where there is a contract containing an arbitration clause formally signed by or on behalf of the state. Accordingly, I accept that the pursuit of a claim in the Spanish proceedings amounted to an adoption by each of the appellants of the agreements. That had two important consequences: it gave the Club (as well as the appellants) the right in each case to refer those disputes to arbitration and it satisfied the requirement of section 9(1) for an agreement in writing.
- The proceedings under section 66 of the Arbitration Act 1996 are for permission to enforce each of the awards as a judgment. In Svenska this court held that such proceedings relate to the arbitration and so fall within section 9(1) of the State Immunity Act. If it were necessary to do so, therefore, I would hold, in agreement with the judge, that the appellants are not immune from the jurisdiction of the English courts in relation to the proceedings.
(iii) Section 3(1)(b) of the State Immunity Act
- Section 3(1)(b) of the State Immunity Act 1978 provides as follows:
"A State is not immune as respects proceedings relating to—
(a) . . .
(b) an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom."
- Mr. Hancock submitted that the appellants were under an obligation to pursue their claims in arbitration in London and that, since that obligation fell to be performed in the United Kingdom, they were amenable to the jurisdiction of the English courts in respect of proceedings relating to that obligation. Mr. Smouha contended, however, that an obligation to arbitrate (if any such obligation existed) fell outside section 3(1)(b) so that the position was governed exclusively by section 9(1) of the Act. Since, like the judge, I am satisfied that the appellants submitted to the jurisdiction by virtue of section 9(1) of the Act, I shall express my opinion on this question as briefly as I can.
- In paragraphs 129-137 of its judgment in Svenska this court considered whether an application to register a foreign arbitration award in this country under section 9 of the Administration of Justice Act 1920 constituted proceedings "relating to" the obligation on which the award was based so as to fall within the expression "proceedings relating to a commercial transaction" in section 3(1)(a) of the State Immunity Act. The court considered that it did not, because the subsection was to be interpreted as referring to the proceedings before the court rather than to the transaction underlying the award. In reaching that conclusion the court was influenced by the overlap that would otherwise exist between section 3 and section 9.
- The court's view that the narrower meaning of section 3(1) was to be preferred (though not the reasoning by which it reached its conclusion) was subsequently endorsed by a majority of the Supreme Court in NML Capital Ltd v Republic of Argentina  UKSC 31,  2 AC 495. However, four members of the court, Lord Phillips of Worth Matravers, Lord Walker, Lord Collins of Mapesbury and Lord Clarke of Stone-cum-Ebony, considered that a potential overlap with section 9(1) was not a ground for giving section 3(1) a narrow rather than a wide construction. Since Lord Phillips and Lord Clarke dissented on the interpretation of section 3(1)(a), those expressions of opinion may not form part of the ratio of the decision, but they carry strong persuasive force. The present case differs from NML, being concerned with proceedings to enforce an arbitration award obtained in this country. Once one accepts, however, that the proceedings relating to arbitration are not governed exclusively by section 9, the question is whether the present proceedings are proceedings "relating to an obligation which by virtue of a contract falls to be performed wholly or partly within the United Kingdom."
- In my view the answer to that question in this case is not straightforward. The appellants themselves have not incurred an obligation to the Club by virtue of a contract in the ordinary sense. At best, all that can be said is that, when a claim was asserted by the appellants and resisted by the Club, a difference arose which, by virtue of the Club rules, the appellants and the Club were entitled to refer to arbitration. It is arguable that that is not sufficient to constitute an obligation of the kind envisaged by section 3(1)(b) and since it is not necessary to reach a final decision on the point for the disposal of the appeal, I prefer not to do so.
E. Are the claims arbitrable?
- Mr. Smouha submitted that the claims made by the appellants in the Spanish proceedings were inherently incapable of being determined by arbitration because a conviction in the proceedings was an essential element of the cause of action against the insurer. Since an arbitrator cannot convict a person of a criminal offence, the claim cannot be constituted in arbitration proceedings.
- It was not disputed that in the ordinary way an arbitrator has jurisdiction to find facts which constitute a criminal offence (fraud being an all too common example) or that in an appropriate case an arbitrator also has jurisdiction to find that a criminal offence has been committed. As the judge pointed out, however, it is necessary to distinguish between a finding of criminal conduct and a conviction which provides the basis for a penal sanction. It may also be important in this context to distinguish between a claim and a dispute or difference.
- Before the judge, as before us, the central plank of the appellants' argument was that liability under Article 117 depends on a conviction. The text of Articles 109, 116 and 117, to which I have already referred, suggests that the liability is civil in nature and that a conviction is merely a precondition to the right to pursue such claims in criminal proceedings. Any doubt about that, however, is in my view removed by paragraphs 106 and 107 of the judgment below. In paragraph 106 the judge found that although claims of this kind are brought under the Penal Code, the relevant provisions are civil in nature and are construed according to civil principles of law. Although the Public Prosecutor has a right to bring claims on behalf of third parties, they remain the third parties' claims, with the result that any judgment is rendered in favour of the third party.
- The judge dealt with the appellants' argument in the following way:
"107. . . . whether the claim is brought under Article 76 or Article 117, the right to recover from the insurer depends on proof of an insured liability under the insurance contract and does not require a finding of criminal liability. Even if it did, it would not be a finding involving criminal responsibility or criminal penal consequences. It would simply be a step towards establishment of a civil law monetary claim. Further, it would be remarkable if civil claims advanced in criminal proceedings were inarbitrable, whereas if the same claims had been advanced in civil proceedings they would not have been, so that arbitrability would effectively be at the option of the claimant."
- In my view this passage amounts to a finding that a conviction is not an integral element of the cause of action. The distinction is important, because even if a conviction were a pre-condition to the right to recover against the insurer, there would be no reason why an arbitrator should not determine a claim of this kind, taking into account whether the condition has or has not been satisfied. He cannot, on the other hand, formally convict any person of a criminal offence.
- The argument does not end there, however, because the arbitration agreement is not concerned with claims as such but with differences and disputes. The principal disputes between the appellants and the Club were whether the appellants were bound by the arbitration clause in the Club's rules and whether the "pay to be paid" clause was effective to defeat their claims. Those were the disputes which the Club referred to arbitration and the grounds on which it sought declaratory awards confirming that it was under no liability. They could be determined by the arbitrator without having to decide whether any of the accused in the Spanish criminal proceedings had committed any offences, since in those proceedings neither of the appellants was seeking to enforce any right against the Club. In my view the matters referred to the arbitrator were capable of being the subject of an award, although the court is entitled to have the final word on jurisdiction. I would grant the appellants permission to appeal on this additional ground, but in my view it does not provide a basis for allowing the appeal.
- For these reasons I am satisfied that the obligation which the appellants wish to enforce against the Club is governed by English law. It cannot be enforced otherwise than by arbitration in accordance with the Club rules and the appellants have submitted to the jurisdiction of the English courts in relation to the determination of the arbitrator's jurisdiction and the Club's application to enforce the award as a judgment. I would therefore dismiss the appeal.
Lord Justice Patten :
- I agree.
Lord Justice Tomlinson :
- I also agree.
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