The Disputes Brief

If a third party seeks to take the benefit of an agreement that is subject to an arbitration clause, it must adhere to (the burden of) that clause. A failure to do so constitutes a breach of contract, rather than a breach of an equitable obligation, and therefore the appropriate remedy is common law damages, not equitable compensation. In arriving at this finding, in Kingdom of Spain and another v London Steam-Ship Owners’ Mutual Insurance Association Limited No 2 [2026] UKSC 36, the Supreme Court confirmed the original arbitral awards, subject to making limited variations reflecting the correct legal basis for the relief. 

What happened? 

In November 2002, the “Prestige” was damaged in a storm and sank off the Spanish coast. Its cargo of oil escaped, causing widespread pollution damage to the coastlines of Spain and France (the “States”). The States brought civil claims under article 117 of the Spanish Penal Code against “the Club”, a mutual association which insured the owners and managers of the Prestige. Article 117 gives a third-party victim a direct right of action against an insurer of liabilities arising from an insured event.  

For English conflict-of-laws purposes, those direct claims were characterised as contractual as the States were seeking to enforce obligations derived from the insurance contract, rather than independent rights of recovery under Spanish law. The claims were therefore subject to the contract’s arbitration clause. The Club commenced arbitration proceedings in London against the States. As well as incorporating a London arbitration clause, the insurance contract also incorporated a “pay to be paid” clause, meaning that it was a condition precedent to the right of recovery for the member to pay the full amount of its liability. 

In the initial arbitrations, the Club obtained declarations that the States were bound by the arbitration clauses and that, pursuant to the “pay to be paid” clause, because the owners of the “Prestige” had not paid the amount of any insured liability, the Club was not liable to the States. The States’ challenges failed and the Club obtained permission to enforce the awards as judgments. Nevertheless, the States continued the Spanish proceedings and obtained judgment against the Club. The Club then initiated further London arbitral proceedings seeking declarations, injunctions, and monetary relief on the basis that the States had pursued their direct claims in the Spanish courts in breach of their obligations to arbitrate. By way of these arbitrations, the Club sought and obtained equitable relief in the form of compensation for costs incurred in defending the Spanish proceedings and for any sums incurred, or to be incurred, if steps were taken to enforce the Spanish judgment. 

The awards were subject to appeals. When the Court of Appeal came to consider the matter, amongst other things, it upheld the High Court Judge’s conclusions that the arbitrators had no power to grant an injunction against a state or to award damages in lieu under section 50 of the Senior Courts Act 1981. However, the Court of Appeal also decided that the arbitrators lacked the power to award equitable compensation for breach of the States’ “equitable obligation to arbitrate” their disputes with the Club. The Court of Appeal therefore allowed the States’ appeals on the basis that equitable compensation should not have been awarded, setting aside the relevant parts of the awards. 

What did the parties argue? 

The parties’ arguments were premised on the conditional benefit principle, namely a party cannot take the benefit of an agreement without accepting the burden in that agreement (i.e. a party cannot have their cake and eat it). In this respect, the principle may be regarded as an exception to the requirement of privity of contract, which holds that a contract only binds the parties to it. The parties, tribunals and courts below proceeded on the assumption, supported by statements in earlier authorities, that the obligation to arbitrate arising through the conditional benefit principle, was equitable.  

How did the Supreme Court decide the point? 

Lords Leggatt and Burrows (with whom the other Lords agreed) held that: (i) a third party entitled to enforce a contract containing an arbitration clause who chooses to take that benefit by asserting a claim under the contract thereby becomes bound by the arbitration clause; and (ii) if the third party breaches that obligation, the remedies available are the same remedies as would be available against an original party for breach of contract. 

In arriving at this conclusion, the Lords analysed how it had come to pass that the third party’s obligation to arbitrate had been characterised as equitable, rather than contractual. They stressed that what mattered was the character of the obligation on which the conditional benefit principle operated. The principle requires the third party taking the benefit to be subject to the same obligation as the original party upon which it was imposed. This means the obligation must retain its character as legal or equitable and the remedies available for breach should be the same. 

Why does this matter? 

The usual remedy where a party litigates in breach of an arbitration clause is an anti-suit injunction. However, by virtue of the rules on state immunity, it was not possible for the Club to injunct the States and damages in lieu. As a result, it was crucial for the Club to identify a mechanism enabling it to seek compensation for the States’ failure to adhere to the obligations in the contract whose terms they sought to rely upon. This judgment certainly acts as a warning to states which may be inclined to litigate in their own courts, rather than to arbitrate in another jurisdiction. Whilst such states may not be injuncted from continuing their litigation, their success in that jurisdiction may well be tempered by contrasting awards which disincentivise enforcement of the judgment obtained and offset the eventual damages due. In this case, the upheld awards do not prevent recognition or enforcement of the Spanish judgment. Rather, they require equal and opposite payments in the circumstances specified. 

The judgment also reinforces the limits of appeals under section 69 of the Arbitration Act 1996. Here, the Lords held that the Court of Appeal should not have interfered with the awards on causation and comity grounds falling outside the questions properly before it. 

Disclaimer: This article is provided for general information only and is accurate as of 1 November 2026. It may not be updated to reflect subsequent legal or other developments. It does not constitute legal advice and should not be relied on as such. Specific legal advice should be obtained in relation to particular circumstances.