Por Jacobo de la Corte Carmona, associate at Dispute Resolution and Arbitration Department Baker McKenzie, Madrid office.
The Spanish Constitutional Court has recently rendered a judgement limiting the concept of public policy and the context of the challenge of an arbitration award.
The purpose of this article includes: (i) a summary of the case’s facts; (ii) an analysis of the principal grounds of the decision; and (iii) a depiction of the benefits of such decision for the Spanish arbitration practice.
I. BACKGROUND OF THE CASE
The origin of the case lies in a lease agreement signed between the parties on 2014, which included an arbitration clause. Pursuant to the mentioned clause, the parties agreed to solve any dispute that may arise in relation to the agreement to an arbitration procedure before the European Association of Arbitration Court 1. Due to several monthly rents unpaid by the tenants, the landlords initiated the arbitration procedure, which concluded with an award that declared the lease termination, including the payment of the outstanding debt and the eviction of the leased building.
The defendants challenged the award before the Madrid Higher Court (the “Court“) in order to set aside the decision rendered by the arbitrator. The challenge relied on the arbitration clause, which considered abusive by the defendants pursuant to the Spanish Consumer Act and, as a consequence, there was not a submission to solve the arising disputes through arbitration. Therefore the clause shall be considered null and void because the arbitration agreement was not valid under Spanish Law.
The Court, following the procedure stated in accordance with Spanish Arbitration Act, determined that the award was in conflict with public policy since the arbitral institution (the European Association of Arbitration) was neither impartial towards nor independent from the parties.
On 2017, both parties notified the Court that they had reached an understanding concerning the payment stated by the award. Consequently, the dispute was settled and the parties requested the termination of proceedings. Notwithstanding the above, the Court rejected the parties’ pleading on the basis that the award remained in conflict with public policy. Pursuant to the Court’s grounds, annulment proceedings by public policy cannot be terminated through a settlement between the parties since their scope is not under the parties’ autonomy. The mentioned interpretation made the Court set aside the challenged arbitral award due to the infringement of public policy, instead of void arbitration agreement as the defendants initially pleaded. The parties demonstrated lack of interest in the ongoing procedure when the Court summoned them for a hearing and neither of them appeared. Nevertheless, the Court deemed that the parties are not entitled to settle a dispute whether there is breach of public policy.
the Court deemed that the parties are not entitled to settle a dispute whether there is breach of public policy
This parties appealed the decision for constitutional protection before the Constitutional Court, on the ground that the Court’s judgment undermined the freedom of choice to settle the dispute, and infringed their effective judicial protection2.
II. MERITS EXPOSED BY THE CONSTITUTIONAL COURT
The Constitutional Court’s decision (the “Decision“) upholds the award and considers that the annulment proceedings shall be interpreted as an external control over the award instead of a review of the case by the courts. Therefore, the Decision declares the Court’s judgment void due to an infringement of constitutional principles. The Decision is based on the following grounds:
i. An infringement of the parties’ effective judicial protection as envisaged in article 24 of the Spanish Constitution. Pursuant to the Decision’s merits, there is no rule that bans the parties to settle an award annulment procedure. The action to set aside an award is aimed to avoid its enforcement, however, the case cannot be reviewed nor decided under this procedure.
Therefore, the parties are entitled to settle the dispute as they please because the controversy remains under their private scope, even if the award is challenged.
ii. A restrictive interpretation of public policy. According to the Spanish constitutional case law, the definition of public policy is wide and non-specific, which enables the courts to judge issues previously solved in arbitration proceedings. Nevertheless, the courts are not able to review award decisions, they are just entitled to set aside an award if the award meets the circumstances envisaged in article 41 of Spanish Arbitration Act. Hence, the Decision reckons that the Court’s judgment tried to amend the award and solve the dispute between the parties based on an infringement of public policy, which undermine arbitration principles, such as the freedom of choice.
iii. The limits to the courts. In defence of arbitration proceedings, the Decision deems that the grounds exposed by article 41 of Spanish Arbitration Act shall be considered as a limit and do not permit wider interpretations. Pursuant to the Decision “the final aim of arbitration is to reach a non-judicial solution of a dispute“3 and this purpose may be distressed if the courts were entitled to analyze the substance of the dispute.
In accordance with all the above, the Decision states that the Court shall accept the termination of arbitral proceeding through a settlement between the parties.
III. IMPACT OF THE DECISION
The doctrine created by the Constitutional Court means an advance in Spanish arbitration. Public policy had been previously defined by the Constitutional Court4 as “a set of necessary formalities and principles to our procedural order and the arbitration that opposes some or several of such principal shall be considered void.” As previously stated, this principle leads to a wide and non-specific interpretation.
Nonetheless, as the Decision states, some courts (and some parties) use the procedure to set aside an award as an appeal against the arbitrator decision. The Spanish Arbitration Act, based on the freedom of choice exercised by the parties, limits the terms and circumstances under which a party may initiate an annulment procedure. The court shall aim to render a judgment according to the grounds set out in article 41 of the Spanish Arbitration Act and do not decide regarding the substance of the dispute, which is under the parties’ private scope.
Consequently, the Decision brings security and assurance in relation to the intervention of courts in annulment proceedings and the application of the public order principle.
Moreover, the Decision is especially relevant in relation to the defense of the parties’ autonomy. One of the main founding of the Spanish Arbitration Act is the freedom of choice exercised by the parties to solve their disputes through arbitration, as well as the settlement of the dispute as the parties please. Therefore, not even public policy can undermine the parties’ freedom.
Finally, this decision is a push up regarding the promotion of Spain as a seat for international arbitrations. The new doctrine issued by the Constitutional Court, along with the recent creation of Madrid International Arbitration Center, has placed Spain as a strong candidate to hold international arbitration disputes.
1 Asociación Europea de Arbitraje in Spanish.
2 A constitutional principle established by Article 24 Spanish Constitution.
3 See Judgement 231/1994 of July 18 .
4 See Judgement 15/1987 of February 11 , Judgment 116/1988 of June 20
rd 23 .