I. Introduction
On 28 October 2026, the UK Supreme Court delivered its unanimous judgment in The Kingdom of Spain and another v The London Steam-Ship Owners’ Mutual Insurance Association Limited (No 2) [2026] UKSC 36, addressing the application of the conditional benefit principle to arbitration agreements and the remedies available when third parties disregard their obligation to arbitrate.
The dispute arose from the sinking of the oil tanker Prestige in 2002 and the subsequent attempts by Spain and France to recover compensation directly from the vessel’s liability insurer.
The central question was whether a third party seeking to enforce rights derived from a contract containing an arbitration clause could be held liable for damages for pursuing proceedings before national courts instead of arbitration.
The Supreme Court held that, where a third party asserts contractual rights subject to an arbitration clause, its corresponding obligation to arbitrate is contractual rather than equitable. Consequently, a breach of that obligation may give rise to common law damages.
The judgment clarifies the remedies available for breaches of arbitration agreements, particularly in cases involving sovereign states where state immunity prevents the granting of injunctive relief.
II. The Facts
In November 2002, the oil tanker Prestige, carrying approximately 70.000 tonnes of oil, sank off the Spanish coast, causing extensive pollution damage along the coastlines of Spain and France.
The vessel’s owners and managers were insured by The London Steam-Ship Owners’ Mutual Insurance Association Limited (the “Club”), a protection and indemnity (“P&I”) insurer.
The insurance contract contained two provisions relevant to the dispute:
- A “pay to be paid” clause, under which the insurer’s liability depended on the insured first discharging its liability to the injured party.
- A London arbitration clause, requiring disputes under the insurance contract to be resolved through arbitration in London under English law.
Spain and France brought direct claims against the Club before the Spanish courts under Article 117 of the Spanish Penal Code, which allows injured third parties to pursue claims directly against liability insurers.
In March 2019, a Spanish court quantified the States’ recoverable claims at approximately EUR 2.355 billion for Spain and EUR 117 million for France, subject to the insurance cover limit of USD 1 billion.
The Club maintained that the States could not rely on the insurance contract while disregarding its arbitration clause. It commenced arbitration proceedings in London, obtaining awards confirming that the States were bound by the arbitration agreement and that the Club was not liable under the “pay to be paid” provision.
Despite those findings, Spain and France continued pursuing their claims through the Spanish courts.
The Club subsequently commenced further arbitrations, seeking declarations and monetary compensation for losses resulting from the States’ failure to comply with their obligation to arbitrate.
The arbitrators awarded compensation for costs already incurred and conditional monetary relief against potential losses arising from enforcement of the Spanish judgment.
The High Court upheld the availability of equitable compensation, but the Court of Appeal disagreed, holding that the arbitrators had no power to award that remedy.
The Club appealed to the Supreme Court.
III. The Legal Issues
1. The Conditional Benefit Principle and Third-Party Arbitration Obligations
The Supreme Court first examined the conditional benefit principle, also known as the “benefit and burden” principle.
Under this principle, a third party who chooses to enforce a contractual right must accept the contractual conditions and obligations governing the exercise of that right.
The Court explained that a third party cannot enforce rights derived from a contract while disregarding an arbitration clause applicable to those rights.
Although the third party did not originally sign the contract, its decision to assert contractual rights subjects it to the arbitration obligation in the same manner as an original contracting party.
The Court emphasised that this does not undermine the principle of privity of contract, since the third party voluntarily chooses whether to claim the contractual benefit.
Accordingly, Spain and France, by seeking to enforce rights derived from the insurance contract, became bound to pursue their claims against the Club through London arbitration.
2. Contractual Obligations Versus Equitable Obligations
A central issue concerned the legal characterisation of the States’ obligation to arbitrate.
Previous decisions had treated the obligation arising under the conditional benefit principle as equitable, leading the arbitrators to award equitable compensation for its breach.
The Supreme Court rejected this approach.
It held that the nature of the obligation imposed on a third party depends on the nature of the underlying contractual burden. Where that burden is contractual, the obligation assumed by the third party retains the same character.
The Court reasoned that a third party enforcing a contractual right should not be placed in a more favourable position than an original contracting party when it breaches the corresponding obligation.
The Court therefore concluded that the States’ obligation to arbitrate was contractual, or was to be treated as contractual, rather than equitable.
This distinction was decisive because equitable compensation is a remedy for equitable wrongs, whereas common law damages are the ordinary monetary remedy for breach of contract.
The Supreme Court accordingly clarified that a third party who breaches an arbitration clause applicable under the conditional benefit principle may be liable for damages for breach of contract.
3. State Immunity and the Availability of Monetary Remedies
The case also raised important questions concerning the interaction between arbitration agreements and sovereign immunity.
Section 13(2)(a) of the State Immunity Act 1978 generally prevents English courts from granting injunctions against foreign states without their written consent.
The Court of Appeal had previously determined that this restriction also prevented the arbitrators from granting injunctions against Spain and France or awarding damages in lieu of injunctions under Section 50 of the Senior Courts Act 1981.
That aspect of the Court of Appeal’s decision was not challenged before the Supreme Court.
The Supreme Court therefore considered whether monetary relief remained available notwithstanding the restrictions on injunctive relief.
It concluded that the unavailability of an injunction did not prevent the Club from recovering common law damages for breach of the contractual obligation to arbitrate.
This judgment thus distinguishes between restrictions on particular remedies arising from state immunity and the availability of damages for breach of an arbitration obligation.
Importantly, the Court did not establish a general exception to sovereign immunity permitting injunctions against foreign states. Instead, it confirmed that an independent contractual basis for monetary relief could exist even where injunctive relief was unavailable.
4. Damages for Past and Future Losses
The Supreme Court further considered whether the arbitrators’ monetary awards could be upheld despite having been framed as equitable compensation rather than common law damages.
The Club had sought compensation for costs already incurred in the Spanish proceedings and for potential future losses arising from enforcement of the Spanish judgment.
The Court distinguished between two situations.
First, damages cannot ordinarily be awarded under common law for a contractual breach that has not yet occurred. Consequently, the Club could not obtain damages merely to protect itself against possible future breaches of the arbitration obligation.
Second, where a contractual breach has already occurred, a court or arbitral tribunal may award conditional damages for losses that arise subsequently as a consequence of that existing breach.
Applying this distinction, the Supreme Court held that the conditional monetary relief granted by the arbitrators could be justified as compensation for future losses resulting from the States’ previous breaches of their obligation to arbitrate.
The awards required the States, if and when the Club incurred specified liabilities through enforcement of the Spanish judgment, to compensate the Club in corresponding amounts.
The Court concluded that the arbitrators would inevitably have granted the same relief had the claims originally been characterised as claims for common law damages.
It therefore found no reason to remit the awards for reconsideration.
5. Limits of Appeals under Section 69 of the Arbitration Act 1996
The Supreme Court also addressed the scope of appeals on questions of law under Section 69 of the Arbitration Act 1996.
It emphasised that an appeal under this provision is confined to the questions of law for which permission to appeal has been granted.
The Court considered that the Court of Appeal had exceeded those statutory limits in parts of its reasoning, particularly when addressing matters extending beyond the permitted questions of law.
The Supreme Court stressed that Section 69 does not permit a general reconsideration of an arbitral award. Its purpose is to allow judicial determination of specific questions of law within the statutory framework.
This aspect of the judgment reaffirms the limited supervisory role of English courts in appeals from arbitral awards.
IV. Conclusion
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 allowed the Club’s appeal and upheld the monetary relief granted in the arbitrations, subject to amendments clarifying its contractual basis.
The judgment establishes that a third party who seeks to enforce rights derived from a contract containing an arbitration clause becomes bound by that clause in relation to its claim. A failure to comply with the arbitration obligation is treated as a breach of contract, for which common law damages may be available.
The decision is especially relevant in cases where an anti-suit injunction is unavailable due to sovereign immunity. The Supreme Court confirmed that this does not, in itself, prevent a party from seeking damages for breach of an arbitration agreement.
The Court also clarified that damages may cover future losses resulting from an existing contractual breach and emphasised the limits of appeals on questions of law under Section 69 of the Arbitration Act 1996.
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