The EU’s mutual trust in the administration of justice does not extend to arbitration (in insurance disputes)
In the context of enforcement of judgments, the CJEU (in Case C-700/20) does not allow arbitration to circumvent the fundamental rules underpinning the Brussels I (recast) Regulation, including the principles governing the victim’s direct action against the insurer and lis pendens.
Prestige oil spill disputes
In 2002, the oil tanker Prestige sank off the Spanish coast, which caused significant environmental damage. This event triggered a criminal investigation, civil litigation and arbitration proceedings. The Spanish state brought civil claims against the London P&I Club, the liability insurer of both the vessel and the owners. Eventually, after a lengthy legal battle, in 2019 the Spanish courts held the insurer liable and ordered it to pay damages following the victim’s direct action under Spanish law. The insurer did not participate in those legal proceedings.
However, meanwhile the insurer had initiated arbitration proceedings in London under English law. In 2013, on the basis of the arbitration clause in the insurance agreement, the insurer had obtained a declaration that it could not be liable to Spain, by virtue of a ‘pay to be paid’ clause (which requires the insured to pay the victim before recovery from the insurer is permissible). Spain had not participated in the arbitration proceedings, even though it had been invited to do so.
Clash at the enforcement stage
The arbitral award and the Spanish court judgment were obviously irreconcilable. However, the arbitral award was presented for recognition first. In October 2013, the English courts granted the insurer leave to enforce the arbitral award. The English courts handed down a judgment in the terms of the award.
In 2019, after obtaining the Spanish judgment, Spain applied for enforcement of this judgment in the English courts. In this context, the High Court of Justice made a referral to the CJEU, in the last days of the transitional period after the UK’s withdrawal from the EU.
Relevant legal provision
The insurer mainly relied on the possibility for the English court to refuse recognition of the Spanish judgment if “it is irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought” (Article 34(3) of the Brussels I Regulation (the “Regulation”), currently Article 45(1) c) of the Brussels I recast Regulation).
The CJEU’s view
The CJEU has confirmed that, despite arbitration being excluded from the Regulation’s scope, the English judgment entered in the terms of the arbitral award, is a judgment in the sense of Article 34(3) of the Regulation. Therefore, in principle, the prior existence of such a judgment could prevent the enforcement and recognition of a subsequent irreconcilable judgment from another Member State.
However, the CJEU has made an exception in the event that the arbitral award, in terms of which the relevant judgment was entered, was made in circumstances that would not have permitted the adoption, in compliance with the Regulation’s provisions and fundamental objectives, of a judicial decision falling within that Regulation’s scope.
This general description covers two rules that the CJEU considers fundamental in the context of the Regulation:
- The relative effect of an arbitration clause included in an insurance agreement; and
- Lis pendens.
Arbitration clause vs. direct action
It is a principle of the CJEU’s case law that a jurisdiction clause agreed between an insurer and an insured cannot be invoked against a victim of the insured. Where national law permits, the victim has a direct action against the insurer in the national courts where the victim is domiciled. The CJEU does not allow this right to be undermined on the basis of an arbitration clause in the insurance agreement.
Lis pendens implies that, when a court is asked to decide, the same matter is pending in another court. In the present case, the arbitration was initiated after the Spanish civil proceedings had already been introduced.
According to Article 27 of the Regulation, any court other than the court first seized must stay its proceedings until the jurisdiction of the court first seized has been established and then, where the jurisdiction of the court first seized is established, decline jurisdiction in favour of that court.
Considering that the minimisation of the risk of concurrent proceedings is one of the objectives and principles underlying judicial cooperation in the EU, the CJEU does not allow a circumvention of these provisions and objectives. Given the completion of arbitration proceedings in disregard of these principles, the judgment entered in the terms of an arbitral award cannot prevent the recognition of a judgment from another Member State.
This CJEU’s ruling has given rise to a number of questions, which will certainly be thoroughly discussed in the near future:
- Is the fact that the relevant English judgment is a judgment “entered in the terms of an arbitral award” essential to the court’s reasoning? Or would the same apply to a judgment simply recognising or allowing the enforcement of an arbitral award?
- Which other provisions or principles does the CJEU consider fundamental rules from which one cannot deviate in order to have a judgment in the sense of Article 34(3) of the Regulation?
- Has the CJEU gone as far as forcing arbitrators to take into account the Regulation’s lis pendens provisions? In other words, would arbitrators have to actually suspend arbitral proceedings?
- Would national courts have to suspend proceedings if an arbitral panel were first seized?
- Does this ruling ‘open the door’ for any further impact of the Regulation on arbitration (related) proceedings, despite arbitration being expressly excluded from the Regulation’s scope?
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