Troubled waters in Spain on the concept of procedural public policy and the non-equivalence of court judgments and arbitral awards
Arbitration in Spain has traditionally been founded on the principle of the inability to challenge before the State Courts the grounds and reasoning of the awards on the facts under discussion and on the applicable law. In addition, and as in most of countries, the concept of procedural public policy has been construed in Spain in an extremely narrow manner. It is traditionally reduced to the respect of the principles of equal treatment between the parties, the right of the parties to be heard, the right to refute other parties’ petition (right of refutation) and the prevention of procedural fraud (the Spanish Arbitration Act, hereinafter ‘SAA’, does not distinguish between internal public policy and international public policy).
Nevertheless, over recent years, case law has been cast by several High Justice Courts, especially the one seated in Madrid, which stretched the concept of procedural public policy beyond its commonly accepted limits and annulled arbitral awards on the grounds of lack or insufficient reasoning, or by challenging the accuracy of the arbitrators’ reasoning and/or application of law. Although these trends have not spread all countrywide and have, so far, been limited to the annulment of internal awards, they have created deep-seated unrest in the Spanish arbitral community. Madrid is the main seat for arbitration in Spain and it is widely accepted by professionals devoted to arbitration that, if such trends become the norm, then Spain would be set apart from mainstream international standards on arbitration.
This paper intends to discuss the origins of such new case law. It also aims to put in writing some thoughts regarding the limits of procedural public policy as grounds for annulling arbitral awards and/or to prevent their enforcement in Spain by the State Courts.
The case law produced by the High Court of Madrid on the annulment of arbitral awards for breach of procedural public policy
The case law analysed hereto, by which the traditional, narrow concept of public policy is suffering a significant enlargement, began within the context of the peak of the financial crisis that severely undermined Spain over the last decade. In such a context, the High Court of Justice of Madrid (HCJM) cast several judgments where it perhaps (and to my view, wrongly) aimed to provide material justice (by redressing theoretical inequality between contractual parties). It annulled several arbitral awards in cases on toxic financial products sold by banks and/or financial institutions to minor investors. In such resolutions, the HCJM both challenged the properness of the application of substantive law performed by the arbitrators, and either the accuracy, or correctness, of the arbitrators’ reasoning.
Far from being halted, this case law trend of expanding the borders of Spanish public policy carried on with subsequent judgments, as those cast by the HCJM on 8 January 2018 and on 5 April 5 2018. Such recent judgments deepened the trend of enlarging the procedural public policy limits, as: 1. Court decisions rest exclusively on the violation by the annulled awards of procedural public policy, and 2. there was not, within the cases at stake, any trace of inequality or abuse of substantial law between the parties ‘inviting’ the Court to (wrongly) opt for material justice.
In its judgment rendered on 8 January 2018, the HCJM annulled an award which had decided on a controversy between two family-owned groups, regarding the winding-up of a company, on the grounds of an alleged breach of procedural public policy. It considered the reasoning of the arbitrators to be improper, as several court resolutions with collateral influence on facts under discussion within the arbitration procedure were not taken into account in the award reasoning. Thus, the HCJM considered that it had the ability to review the award reasoning and to annul the award on the basis that its underlying reasoning was insufficient or improper.
In its judgment rendered on 5 April 2018, the HCJM annulled an award in a case where the litigation related to the construction of a wind farm, by challenging the assessment made by the arbitrators on the importance granted to certain pieces of evidence to the detriment of others (the arbitrators based their decision on statements made in several emails and set aside other evidence). The HCJM considered the reasoning by which arbitrators reached their conclusions to be inappropriate, since the arbitrators did not consider certain pieces of evidence regarded as relevant by the court. The judgment therefore ordered the annulment of the award. Thus, in this type of resolution, the HCJM not only concluded that the reasoning of the arbitrators was part of the Spanish procedural public policy, but considered that the State Courts were even allowed to review the adequateness and properness of the assessment the arbitrators made with regards to the evidence on which they founded their awards.
The origins of the new case law trend; amendment of the Spanish Arbitration Act and the concept of equivalence between court judgment and arbitral awards.
There is a dual common rationale behind the case law referred to in the first section of this article. Firstly, there is the lack and/or insufficient reasoning of an arbitral award as a breach of Spanish procedural public policy and, secondly, there is the equating of the standards in terms of the reasoning for an arbitral award and for a judgment rendered by state courts. The latter occurs by applying a misled and biased interpretation of the concept of ‘jurisdictional equivalent’ – a concept created by the Spanish Constitutional Court (‘SCC’) to underline the same effects from a res judicata perspective of an arbitral award and a Court judgment).
The inclusion of the compulsory reasoning of arbitral awards as part of Spanish procedural public policy finds its roots in the amendment of Article 37.4 of the SAA that came into force in May 2011, by which, in broad terms, the lawmaker eliminates the possibility of agreement between the parties that an arbitration could be decided by a non-reasoned award. This therefore requires that arbitral awards rendered in Spain be reasoned in any case. This amendment is not in line with the dominant trend of international arbitration. Many arbitration laws accept non-reasoned awards (insofar as the parties have agreed) as valid and enforceable (as, for example, in Article 52.4 of the English Arbitration Act of 1996; Article 1054.2 of the German Arbitration Act of 1998; Article 38.1 of the Japanese Arbitration Act; Article 42.3 of the Portuguese Arbitration Act of 2011; Article 1057.5 of the Dutch Civil Procedure Code and Article 1244.8 of the Luxembourgian Civil Procedure Code).
With such an amendment of SAA in 2011, the HCJM and some other scattered courts consider that the level of reasoning that an arbitral award must contain has to be equivalent to the standard requested for State Court judgments. This applies the concept of the ‘jurisdictional equivalent’ to arbitration. This concept was conceived by the SCC to grant the same effects of res judicata to arbitral awards and to State Court judgments. However, the clef de voûte of the issue lies with the fact that the SCC never stated that awards and judgments were of the same nature and thus both had to abide by the same standards in terms of reasoning. It is thus through a misled interpretation of the concept of the ‘jurisdictional equivalent’ that the HCJM has annulled awards on the grounds of insufficient reasoning as they did not meet the reasoning requirements requested by a court judgment.
Therefore, and although this may seem an obvious matter from an international perspective, the essential issue at stake is whether, in Spain, the validity and enforceability of arbitral awards require the same standards of reasoning as court judgments on the basis of Spanish procedural public policy.
Several significant professional voices have already pointed out that state courts should come back to the traditional, narrowly-construed concept of procedural public policy, refraining from reviewing and refuting awards’ reasoning to void them and/or to prevent them from being enforced. The judgment rendered by the Spanish Constitutional Court on 11 January 2018, included a dissenting vote from three judges who did not endorse the concept of the ‘jurisdictional equivalent’ insofar as such a concept entails the same reasoning requirements for an arbitral award that those required for State Court judgments.
Although almost exclusively focused in Madrid and, so far, restricted to the annulment of domestic awards, the caselaw trend initiated by the HCJM, which expands the concept of procedural public policy, is in line neither with international standards on arbitration, nor with the Spanish lawmaker’s intention to promote arbitration as an alternative to dispute resolution and discharge collapsed State Courts. To tackle this trend, which sets Spain apart from the mainstream of international arbitration standards on the interpretation of procedural public policy, it would be highly advisable to undo the amendment introduced in 2011 on Article 37.4 of the SAA (thus recovering the possibility for the parties to agree on a non-reasoned award), and to revert to the traditional, narrowly-construed concept of procedural public policy, according to which an improperly and/or inaccurately reasoned arbitral award does not breach Spanish procedural public policy.
1 Ley 60/2003, de 23 de diciembre, de Arbitraje.
2 Sala de lo Civil y de lo Penal, Sección Primera, del Tribunal Superior de Justicia de Madrid.
3 Judgments rendered by the High Court of Madrid (Sala de lo Civil y de lo Penal, Sección 1ª, del Tribunal Superior de Justicia de Madrid) on 28 January 2015, 14 April 2015, 23 October 2015 and 17 November 2015.
4 In its initial wording, Article 37.4 of the SAA allowed the parties to agree on a non-reasoned award. Such a possibility was eliminated by the new wording of that article introduced by the Act 11/2011, of 20 May 2011.
5 See the judgment rendered by the High Court of Justice of Asturias 3/2017.
Arco, Barcelona and Madrid
rogercanals [at] arcoabogados.es