Prestige No.2

The final aspect of the dispute concerned the conditional benefit principle and the consequences of breach of an obligation to arbitrate (identified as equitable in nature in earlier phases of the litigation) imposed upon a third party by that principle. Was it possible to obtain equitable compensation for breach of such an equitable obligation to arbitrate imposed on two States (France and Spain) that had obtained a Spanish judgment in defiance of an arbitral award declaring that: (i) there was an obligation to arbitrate; and (ii) there was no liability because of a “pay to be paid” clause, which award had been turned into a s.66 judgment and upheld as such by the Court of Appeal. Spain and France had, notwithstanding these declarations, now made by the High Court (and upheld by the Court of Appeal), continued to pursue a statutory direct action in Spain in which they asserted their entitlement (and that of a number of other direct action victims of maritime pollution) to the assert the benefit of a policy of maritime insurance in the shoes of the insured, which had not paid out any compensation to such victims. State immunity had precluded enforcement of the obligation to arbitrate in the usual way by an injunction.

The Supreme Court judgment, given by Lords Leggatt and Burrows, is likely to be pored over (and not just by enduring fans of Tito v Waddell) not least for its general statements on the interaction between law and equity and about remedies. There are four broad themes of note.

First, the SC have revisited, refashioned and rationalised the conditional benefit principle. It is now very clearly a tool of both common law and equity, and where it applies at common law it runs in effect as a full exception to the rules on privity of contract. A party taking a contractual benefit is fixed with any indissociable burden attached to that benefit, and the counterparty has all the ordinary contractual remedies for breach of that indissociable burden, available as if the party taking the benefit were a contracting party. Likewise, where the benefit taken is equitable, the usual equitable remedies to enforce the original equitable obligation indissociable from that benefit will be available. The received wisdom that conditional benefit principle when applied to arbitration clauses operated only in equity (so as to create a purely equitable obligation to arbitrate) has been clearly rejected, and the approach of Hobhouse LJ in Jay Bola, which is identified in effect as being the point at which the current heresy started, disapproved (even if the final result in that case was sound).

Secondly, the judgment is interesting for what it says in general about equitable remedies and their parallels to contractual remedies, and what it says about equitable compensation in particular. The judgment is categoric that if the correct analysis ha been equitable, then equitable compensation would and should have been available. But the theme appears to be more broadly that if there is an adjacent or analogous contractual right to the equitable obligation, one should expect the remedies to be the same. The result will on this approach be remedial convergence between law and equity where such is principled. Employment and IP lawyers should note this may be very important for breach of confidence, given the debate that has long raged there about remedies for breach of purely equitable duties of confidence. Of particular note is the Court’s rejection of the Court of Appeal’s conclusion that Lord Cairns Act , now section 50 SCA 1981 , in effect ousted the potential for equitable compensation (an argument of otherwise considerable practical significance in the context of breach of confidence, where it had formerly arisen). The CA central reasoning on that topic was crisply rejected.

Thirdly, the judgment is significant as what is said about the remedy of an indemnity for future losses caused by a past breach of contract (here, the past breach being the obtaining of a foreign judgment in a breach of the legal obligation to arbitrate imposed by the conditional benefit principle, the future loss being the potential enforcement of that wrongly obtained judgment in other foreign courts) . Such a remedy is in principle available in contract as well as in equity (the States had argued otherwise).

Fourth, there is a resounding reaffirmation of the Sharp v Viterra approach on the narrowness of arbitration appeals, in a passage that that was a firm corrective to the approach adopted by the Court of Appeal which had grounded their approach on a number of topics that had not been duly appealed from the two Awards or from the decision of Butcher J below.

In the long run this case is probably going to be a bit of a must read for those exploring the borders of equitable relief or indemnities as remedies; and of note to those with arbitration appeals. Outside equitable duties to arbitrate (most often the product of foreign direct action statutes in an insurance context) and the land law context of estates and caravan parks (for maintenance/upkeep obligations that do not run with land) the conditional benefit is somewhat recondite, though the judgment will be of potential importance by analogy also to the parallel doctrines of assignment and subrogation with which conditional benefit has now been fully aligned, where the assignee or subrogee takes a benefit that is attended by an indissociable burden (e.g. an arbitration clause or some other obligation e.g. to make a payment).

Tom de la Mare KC appeared for the Appellant

The judgment can be found here.