If a third party sues abroad to enforce rights derived from an insurance contract, in breach of the contract’s arbitration clause, what can the insurer recover? On 28 October 2026, in The Kingdom of Spain and another v The London Steam-Ship Owners’ Mutual Insurance Association Limited (No 2) [2026] UKSC 36, the Supreme Court held that the third party’s obligation to arbitrate is contractual, not equitable, so the monetary remedy for breach is common law damages, not “equitable compensation”. Lord Leggatt and Lord Burrows gave the judgment, with which Lord Lloyd-Jones, Lord Doherty and Lord Snowden agreed. The court allowed the insurer’s appeal and confirmed the arbitrators’ monetary awards against Spain and France, subject to amendments recording their legal basis (paras 9, 155).
What the case was about
In November 2002 the tanker Prestige, carrying 70,000 tonnes of oil, sank off the Spanish coast, polluting the Spanish and French coastlines (para 3). The appellant, a P&I club (“the Club”), insured the ship’s owners and managers under a contract containing a “pay to be paid” clause and a London arbitration clause (para 4). Spain and France sued the Club directly in Spain under article 117 of the Spanish Penal Code, and a 2019 Spanish order declared them entitled to up to around €2.355 billion and €117 million respectively, subject to the US$1 billion limit of cover (paras 5–6).
English courts had already held that the States’ direct claims were in substance contractual, so they had to be pursued in London arbitration and were subject to the pay to be paid clause, and that by suing the States had “agreed in writing” to arbitrate for state immunity purposes (paras 14–16). The States carried on in Spain regardless (para 17). In further arbitrations the arbitrators granted declarations and, conducting the case on the assumption that the obligation to arbitrate was equitable, awarded “equitable compensation”, including conditional orders for an equal and opposite payment if the Spanish judgment is enforced against the Club (paras 23, 27–30, 152).
An injunction was not available because section 13(2)(a) of the State Immunity Act 1978 bars injunctive relief against a state, absent written consent, which was not given here; it followed that there was also no power to award damages in lieu of an injunction under section 50 of the Senior Courts Act 1981, a ruling not challenged on this appeal (para 2). The Court of Appeal went further and held that there was no power to award equitable compensation either, and set aside those parts of the awards (para 37).
What the Supreme Court decided
The court said the debate rested on a false premise (paras 9, 100). Under the conditional benefit principle, a third party who takes the benefit of a contract takes the obligation as it finds it: a legal obligation stays legal and the remedies for breach should be the same (paras 59–60). The best analysis is that the third party is treated as a party to the contract for the purposes of the arbitration clause, so its breach is (or is treated as) a breach of contract (paras 61, 65). Anything else could leave the third party better off than a contracting party, for example through equitable defences such as laches (para 62). The court traced the contrary view to a passage of Hobhouse LJ in The Jay Bola (1997) (paras 68, 75–76).
Notably, the contractual characterisation was first raised by the court itself during the hearing, and further written submissions were invited (para 134).
The court then rejected the Court of Appeal’s four reasons. The principle is “defensive” only in the sense that no obligation arises until the third party claims the benefit; once it does, there is no principled basis for excluding monetary relief (paras 103–104). State immunity from injunctions reflects their coercive effect and does not preclude common law damages (paras 108–109). The unavailability of section 50 does not cut down damages for breaches already committed (paras 115–116). On causation and international comity, the Spanish courts’ decisions were not the sole cause of the Club’s loss, and in any event the Court of Appeal should not have decided those points because they were outside the limits of an appeal under section 69 of the Arbitration Act 1996 (paras 118, 123–124, 127).
The States’ issue estoppel argument failed, and refusing relief because the claim had been labelled “equitable compensation” would elevate form over substance (paras 142, 145). Damages cannot be awarded at common law for future wrongs, so the alternative basis for future relief fell away (paras 148–149). But a conditional award for future losses flowing from breaches already committed is permissible, and the awards were of that kind (paras 150–152). There was no need to remit; the awards were confirmed, with a recital clarifying the contractual basis and deletion of the word “equitable” from the France declarations (paras 154–155).
Why it matters
- Arbitration clauses bind third-party claimants as contract terms. A third party who enforces a contract containing an arbitration clause is bound by it in the same way as a party, with the same remedies for breach (para 65).
- Damages are available even where an injunction is not. A state’s immunity from injunctions does not itself prevent an award of common law damages for breach of the obligation to arbitrate (paras 108–109).
- Conditional damages for future loss. A tribunal can order common law damages to be paid if and when loss arises from a breach already committed, though not for breaches yet to occur (paras 112, 149–151).
- Section 69 appeals have firm limits. The court criticised the Court of Appeal for deciding questions the arbitrators were never asked to determine (paras 123, 127).
- In our view, the decision gives insurers facing direct claims in foreign courts, in breach of a London arbitration clause, a clearer basis for monetary relief where an anti-suit injunction is not available.
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Read the full judgment: The Kingdom of Spain and another v The London Steam-Ship Owners’ Mutual Insurance Association Limited (No 2) [2026] UKSC 36 (The National Archives).