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Can Sovereign States Be Forced to Arbitrate?

In the context of an environmental disaster in which massive oil pollution was caused by a ship breaking up off the Spanish coast, important and novel issues have been raised as to whether a foreign sovereign state can be required to submit to arbitration proceedings in London.

ship2The Kingdom of Spain had launched criminal proceedings against various parties in respect of the sinking and, as was permitted under Spanish law, civil compensation claims against, amongst others, the ship’s mutual insurers had been rolled up in those proceedings.

The insurers declined to participate in the Spanish proceedings, instead serving a notice of arbitration on the Kingdom in reliance on an English arbitration clause contained within the insurance contract. The Kingdom denied that it was under any obligation to participate in the arbitration proceedings.

The High Court nevertheless appointed an arbitrator who ruled in the insurers’ favour on certain liability issues and, in any event, placed a $1 billion cap on any liability that they might be found to have under Spanish law. The insurers subsequently launched proceedings in London for summary enforcement of the arbitration award.

In those proceedings, the insurers sought to establish the primacy of the arbitration award over any potentially inconsistent judgment of the Spanish court. However, the Kingdom retorted that it was not a party to any arbitration agreement and intended to apply for the arbitrator’s award to be set aside for want of jurisdiction.

The Kingdom submitted that the issue of the insurers’ liability was currently subjudice in the Spanish criminal proceedings. It also reserved the right to argue that the English proceedings were misconceived in that the Kingdom was not a legal entity and lacked legal personality for the purposes of private international law.

In a preliminary hearing, the insurers argued that the Kingdom should be debarred from pursuing certain arguments due to its delay in responding to the English proceedings. However, in granting any time extensions required, the Court ruled that the Kingdom should be permitted to ‘deploy its full armoury’ of objections to the enforcement of the arbitration award and the award itself. The dispute would now proceed to a full hearing of all the issues.