The Kingdom of Spain and another v The London Steam-Ship Owners’ Mutual Insurance Association Limited No 2 [2026] UKSC 36

Spain and France sued the Prestige's P&I insurer in Spain instead of arbitrating in London. The Supreme Court held that their obligation to arbitrate was contractual, not equitable, so the insurer could recover common law damages. It confirmed the arbitrators' monetary awards.

Facts

In November 2002 the tanker ‘Prestige’, carrying 70,000 tonnes of oil, sank off the Spanish coast. The resulting pollution damaged the Spanish and French coastlines. The appellant (the Club), a P&I club, insured the vessel’s owners and managers under a contract incorporating its Rules. Two rules mattered. One was a ‘pay to be paid’ clause, which made payment by the member of its liability a condition precedent to recovery. The other was a London arbitration clause governed by English law.

Spain and France (the States) brought civil claims against the Club in Spain under article 117 of the Spanish Penal Code 1995. That provision gives third-party victims a direct right of action against an insurer. The Club was held directly liable. An execution order of 1 March 2019 (the Spanish judgment) declared the States entitled to recover around €2.355 billion (Spain) and €117 million (France), subject to the US$1 billion limit of cover.

Procedural history

The Club arbitrated in London. Alistair Schaff QC declared that the States were bound by the arbitration clause and that, because of the ‘pay to be paid’ clause, the Club was not liable. Applying the test in Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Co (The Hari Bhum) (No 1) [2003] EWHC 3158 (Comm); [2004] 1 Lloyd’s Rep 206, he characterised the direct claims as claims to enforce a contractual obligation derived from the insurance contract.

Hamblen J upheld the awards in The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain (The Prestige) (No 2) [2013] EWHC 3188 (Comm), and the Court of Appeal affirmed ([2015] EWCA Civ 333). Both courts held that the States had ‘agreed in writing’ to arbitrate for the purposes of section 9(1) of the State Immunity Act 1978. The States nonetheless continued with the Spanish proceedings.

The Club then began further arbitrations seeking declarations, injunctions and monetary relief. Following The Prestige (Nos 3 and 4) [2020] EWHC 1582 (Comm); [2021] EWCA Civ 1589, Sir Peter Gross (in the Spain arbitration) and Dame Elizabeth Gloster (in the France arbitration) were appointed. Everyone proceeded on the assumption that the States’ obligation to arbitrate was equitable. Both arbitrators awarded ‘equitable compensation’ for past losses, mainly the costs of the Spanish proceedings. They also made conditional ‘equal and opposite’ indemnity orders covering future enforcement of the Spanish judgment. Dame Elizabeth Gloster also granted an injunction against France.

On appeals under section 69 of the Arbitration Act 1996, Butcher J held that no injunction, and no damages in lieu under section 50 of the Senior Courts Act 1981, could be awarded against a state, because of section 13(2)(a) of the State Immunity Act 1978. He nevertheless upheld the power to award equitable compensation, calling it ‘a sensible incremental development’. The Court of Appeal ([2024] EWCA Civ 1536) agreed that injunctions and section 50 damages were unavailable, and there was no appeal on that point. However, it held that there was no power to award equitable compensation and set aside the monetary parts of the awards.

Issues

The Club had permission to appeal on two grounds:

• Ground 1: whether the Court of Appeal erred in holding that there is no power to award equitable compensation for breach of an equitable obligation to arbitrate in a conditional benefit case against a state.
• Ground 2: whether the Court of Appeal exceeded the statutory limits of an appeal under section 69 of the Arbitration Act 1996.

The court reframed Ground 1 as resting on a ‘loaded’ assumption. The prior question was whether an obligation to arbitrate arising under the conditional benefit principle is equitable or contractual. If contractual, the next question was how that affected the awards.

Arguments

The Club argued that the Court of Appeal had wrongly denied a monetary remedy and had gone beyond the questions properly before it. Once the court itself raised the contractual characterisation, the Club argued that a claim for breach of a contractual obligation was no weaker than one in equity, so the awards should be confirmed without remission. It also argued that future losses could be compensated either as the consequences of past breaches or on a quia timet basis.

The States supported the Court of Appeal’s reasoning. They said its views on causation and comity were not part of its ‘core reasoning’. On the contractual analysis, they made three points. First, issue estoppel arose from statements in the Schaff awards and The Prestige (No 2) that the States were not in breach of contract. Second, the Club had consistently declined to plead breach of contract. Third, the matter should at least be remitted so the States could argue that damages cannot be awarded for breaches not yet committed.

Judgment

Lord Leggatt and Lord Burrows gave a joint judgment, with which Lord Lloyd-Jones, Lord Doherty and Lord Snowden agreed. The judgment was therefore unanimous.

The nature of the obligation

The court explained that equitable compensation is available for equitable wrongs, such as breach of fiduciary duty or breach of confidence, but not for breach of contract. It relied on Target Holdings Ltd v Redferns [1996] AC 421 and AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58. The two remedies differ: equitable compensation is discretionary and subject to defences such as laches and lack of clean hands. Questions of ‘fusion’ of law and equity were outside the scope of the appeal.

The court separated two senses of ‘conditional benefit’. The first is a right that exists only if a condition is met, such as the ‘pay to be paid’ clause. The second is the benefit and burden principle, under which asserting a right subjects the claimant to a related obligation. Drawing on Tito v Waddell (No 2) [1977] Ch 106, Aspen Underwriting Ltd v Credit Europe Bank NV [2020] UKSC 11 and Aspden v Seddon (No 2) (1876) 1 Ex D 496, the court observed that the principle operates at common law as well as in equity. It does not undermine the rationale of privity, because the third party chooses whether to take the benefit. The court endorsed Megarry V-C’s view that whether the liability is legal or equitable depends on the character of the burden itself. It concluded that the third party is bound ‘in the same way as a party to the contract’. It would be irrational to leave the third party potentially better off than a contracting party, for example through equitable defences unavailable against a claim for damages. The court found support in the law of assignment and in section 8(1) of the Contracts (Rights of Third Parties) Act 1999. Its conclusion was:

We conclude that an obligation to arbitrate arising by operation of the conditional benefit principle is a contractual obligation owed at common law and not an equitable obligation. Its breach is therefore not an equitable wrong and equitable compensation is not an available remedy.

Where the case law went wrong

The court traced the error to Hobhouse LJ’s ‘simple analogy’ in Schiffahrtsgesellschaft Detlev Von Appen GmbH v Voest Alpine International GmbH (The Jay Bola) [1997] 2 Lloyd’s Rep 279. The court thought it might more accurately be called ‘a complicated analogy’. It used equitable assignment and equitable set-off to illustrate a right that was in fact contractual. Properly understood, however, The Jay Bola supported the contractual analysis, as did Sir Richard Scott V-C’s concurrence.

The court criticised the obiter statement in Through Transport (No 1) [2004] EWCA Civ 1598 that the club could not sue for damages. It also held that the ‘equitable right’ analysis in West Tankers Inc v Ras Riunione Adriatica di Sicurta SpA (The Front Comor) [2005] EWHC 454 (Comm), approved in Airbus SAS v Generali Italia SpA [2019] EWCA Civ 805, was misconceived. The court noted that subrogation was not an issue for decision, but said its effect cannot sensibly be to transmute a contractual obligation into an equitable one. The view taken in Thomas Raphael’s The Anti-Suit Injunction was described as unsound. The equitable analysis was also inconsistent with established propositions treating the obligation as contractual: its conflict of laws characterisation, extra-territorial jurisdiction, the approach in The Angelic Grace, the tribunal’s substantive jurisdiction, section 18 of the 1996 Act, and the State Immunity Act 1978, section 9(1).

The Court of Appeal’s four reasons

(1) A ‘defensive’ principle. The court accepted that the third party owes nothing unless and until it claims the benefit. Once it does, however, there is no principled basis for excluding monetary relief. The court said:

It would be irrational to permit the coercive remedy of an anti-suit injunction to restrain breach of the obligation to arbitrate while denying the availability of damages if a breach is committed.

Cases such as Aspden v Seddon (No 2), Halsall v Brizell [1957] Ch 169 and Thamesmead Town Ltd v Allotey showed that the principle can found positive monetary claims. The unavailability of an injunction against a state reflects the coercive, enforcement character of injunctions, as explained in UK P&I Club NV v República Bolivariana de Venezuela [2023] EWCA Civ 1497. It does not bar damages.

(2) Section 50. Lord Cairns’ Act, now section 50, conferred a power to award damages that did not otherwise exist, including damages in substitution for a quia timet injunction. Its unavailability meant that the Club’s quia timet basis for future loss failed, because common law damages cannot be awarded for future wrongs. However, it did not cut down the common law power to compensate for past breaches, including future losses flowing from them.

(3) Causation. The Spanish courts’ decisions were one cause of the losses, but not the sole effective cause. Sir Peter Gross had found that the Club acted reasonably in not appearing on liability, and that there was a real risk the Spanish courts would reject the ‘pay to be paid’ defence in any event. That risk was among those the Club had bargained to avoid. The court called that reasoning ‘unimpeachable’. It also noted that the ‘pay to be paid’ clause imposed no obligation that could be ‘breached’. More fundamentally, applying Sharp Corpn Ltd v Viterra BV [2024] UKSC 14, causation was not a question the tribunals were asked to determine or on which permission to appeal was granted. The Court of Appeal should not have considered it. Ground 2 therefore succeeded on this point.

(4) Comity. The analogy with anti-enforcement injunctions drawn in Ecobank Transnational Inc v Tanoh [2015] EWCA Civ 1309 was unpersuasive. The awards do not prevent any foreign court from recognising or enforcing the Spanish judgment; they only require compensation for loss. In any event, comity was outside the scope of the section 69 appeals and was irrelevant to whether the power existed. The court accepted that the Court of Appeal’s comments on ‘relative culpability’ formed background and played no part in its legal reasoning.

Consequences for the awards

The court had raised the contractual characterisation itself and invited further written submissions. It held that there was no procedural unfairness and that it was not bound by the parties’ shared assumption on a point of law (R v McCafferty [2026] UKSC 20).

Issue estoppel failed. Under Skatteforvaltningen v MCML Ltd [2026] UKSC 19, it applies only to determinations necessary for and fundamental to the earlier decision. Whether the breach was contractual or equitable, and whether damages were available, had never been decided. The logic of the earlier rulings in fact treated the States as equivalent to contracting parties.

The pleading point also failed. The court said:

Denying relief to which a claimant was legally entitled because an incorrect classification was adopted would elevate form over substance.

On remission, the test was whether the arbitrators might possibly have refused relief if the claim had been framed in contract. No such suggestion was made about past losses. For future losses, the quia timet basis was invalid:

There is, in our view, no way around the point that, outside section 50, monetary compensation cannot be awarded in respect of future wrongs.

Authorities such as Household Machines Ltd v Cosmos Exporters Ltd [1947] KB 217, however, permit conditional orders for future loss flowing from an accrued cause of action. The States did not dispute that jurisdiction. The court acknowledged that this departs from the general rule that common law damages are awarded unconditionally, but said ‘so be it’. The awards were conditional in exactly this way. Dame Elizabeth Gloster had expressly relied on the past-breach basis, and her conclusion would inevitably have been the same in contract. Spain could be in no better position than France. Remission was therefore unwarranted.

Implications

The decision holds that where a third party enforces a contractual right under an exception to privity, such as a statutory direct action against an insurer, and so becomes bound by an arbitration clause, the resulting obligation is contractual. Breach sounds in common law damages, not equitable compensation. It disapproves the ‘equitable obligation’ analysis in West Tankers, Airbus and the commentary following them, and corrects the obiter reasoning in Through Transport (No 1). The court noted that, ordinarily, the label would not matter because an injunction or section 50 damages would be available. It mattered here because state immunity excluded those remedies.

For P&I clubs and other insurers facing direct actions abroad, the decision confirms that damages, including conditional orders for future losses flowing from breaches already committed, may be available against third parties who litigate in breach of an arbitration clause, even where they are states immune from injunctive relief. The limits are important. Compensation cannot be awarded quia timet for future breaches outside section 50. The comments on subrogation were expressly not decided. The court left wider questions of fusion of law and equity untouched. The decision also reinforces Sharp v Viterra: appellate courts hearing section 69 appeals must confine themselves to the questions of law properly before them and accept the tribunal’s findings of fact.

Verdict: The Supreme Court unanimously allowed the Club’s appeal. It held that the States’ obligation to arbitrate, arising under the conditional benefit principle, was contractual rather than equitable, so the appropriate remedy was common law damages and not equitable compensation. The Court of Appeal’s order setting aside the monetary relief was reversed, and remission was refused. The arbitral awards were confirmed, subject to two variations: a recital, with wording to be agreed by the parties, clarifying that the monetary relief rests on breach of a contractual obligation; and deletion of the word ‘equitable’ from the declarations in Dame Elizabeth Gloster’s Second Partial Award.

Source: The Kingdom of Spain and another v The London Steam-Ship Owners' Mutual Insurance Association Limited No 2 [2026] UKSC 36