Madrid court sets aside awards on grounds of public order after reviewing merits

Under the Spanish Arbitration Law,[1] an arbitral award is final and binding and can only be challenged on six specific grounds, including that the award is contrary to public order.[2] Up until now, when considering challenges to arbitral awards, Spanish courts have held that an award cannot be appealed or reviewed on its merits[3] and that it is not the role of the Spanish courts to correct hypothetical deficiencies in the merits (fact and law) of the award. The concept of "public order" has also been very narrowly interpreted, requiring a violation of a fundamental constitutional right or, more recently, a breach of competition and antitrust principles as required under European Union law.[4]

Three recent decisions of the Tribunal Superior de la Justicia, Madrid (the "Court")[5][6] have apparently changed, or at least cast doubt, on this past approach. In all three cases, the Court has set aside arbitral awards after reviewing the merits of the decision taken by the relevant arbitral tribunals and finding the incorrect application of the law to be contrary to Spanish public order[7]. In so doing, the Court has arguably exceeded the scope of its formal functions of the judicial supervision of arbitration, adopting a new and extended definition of public order as a basis for setting aside the award.

28 January 2015 decision of the Court (recently published)

1. Facts

The claimant, Repos I Repàs, S.L., a Spanish company in the restaurant and catering business ("Claimant"), commenced an arbitration in the Madrid Court of Arbitration (Corte de Arbitraje de la Cámara de Comercio e Industria de Madrid) against a Spanish bank, Banco Bilbao Vizcaya Argentaria, S.S ("BBVA" or the "Bank"), requesting the annulment of two swap contracts entered into between the Claimant and BBVA in January 2008.

The Claimant argued that the contracts were null and void on the basis of a lack of informed consent due to the Bank's failure to provide the Claimant with information, as it was required pursuant to the obligations of diligence, loyalty, information and disclosure imposed by the Spanish Stock Exchange Act[8] and other applicable Spanish and European Union law, in order that the Claimant understand the risks associated with the complex financial product that it had contracted.

On 14 January 2014, an arbitral tribunal of three arbitrators rendered an award which dismissed the claims. The Claimant then applied to the Court to have the award set aside.

The Claimant argued two grounds: firstly, that the Madrid Court of Arbitration and two of the arbitrators lacked independence and impartiality (a claim which was dismissed by the Court) and secondly that the award was contrary to public order.

Specifically, the Claimant argued that the award should be annulled on the basis that the arbitral tribunal had incorrectly interpreted and applied the relevant Spanish and European Union law which sets out the obligations of banks relating to information disclosure. The Claimant argued that, as the award had incorrectly considered the relevant law, it was not properly reasoned, was arbitrary and on this basis, contrary to "economic" public order.[9] The Claimant invited the Court to re-examine substantive issues that had already been decided and rejected by the arbitral tribunal.

The Bank opposed the request, arguing that the Court was not empowered to re-evaluate the arbitral tribunal's analysis and application of the law as set out in the award nor the tribunal's assessment of the evidence placed before it.

The Court upheld the Claimant's claims and granted the request to set aside the award.

The Court's analysis

The Court referred to the Spanish Arbitration Law and earlier Spanish case-law[10] and reiterated that an action for the annulment of an award is neither an opportunity to appeal the award nor permit the judge to re-examine issues debated during the arbitration and the arbitral tribunal's consideration of the facts and the application of law.

The Court referred to the Preamble to the Spanish Arbitration Law which confirms that the grounds for the annulment of an award are strictly those as defined in the Law and states that as a general rule (the Judgment including these words in italics) courts were not permitted to review the merits of the decision of the arbitral tribunal.[11]

The Court also referred to earlier case law and noted that the control of the court in an action to set aside an award was extraordinary, limited to specific circumstances and sufficient to satisfy the right to due process and that it was not its function to correct alleged deficiencies or omissions in the award.

The Court proceeded to elaborate upon the definition of public order pursuant to Spanish law, emphasising that as alleged by the Claimant, it “(…) includes both the protection of fundamental rights and liberties as recognised by the Spanish Constitution and as also recognised in European Union law, the so-called “public economic order”, which includes certain basic and non-renounceable rules and principles of contracting in cases of special importance or with special needs for protection”.[12]

Referring to jurisprudence of the Court of Justice of the European Union and Spanish Supreme Court, the Court further emphasized that the general principle of good faith in contracting is a "prominent paradigm" of the concept of "public economic order".

However, the Court, seemingly in direct contradiction with its earlier declarations, and with a view to "verify" whether the concept of economic public order had in fact been breached, proceeded to review the arbitral tribunal's interpretation and application of relevant law.

The Court entered into an analysis of the law and jurisprudence on banks' duties of disclosure in relation to the commercialisation of complex financial products and the effect of non-compliance of such duties on the nature of the consent provided by the party contracting with the bank. The Court emphasised the Supreme Court decision of 20 January of 2014, No. 354/2014, which defined the scope of the doctrine of good faith in the context of banks' offerings of complex financial products and the mandatory requirement to "protect the consent" given those who are not professionals in financial markets and lack the requisite experience and knowledge of these complex instruments.

After re-analysing the relevant law, the Court applied its analysis to the facts of the case in order to determine whether the reasoning of the tribunal was contrary to the concept of economic public order, that is, whether the reasoning had breached basic elements pertaining to financial product contracts and/or infringing fundamental rights and civil liberties.[13]

The Court added that while it was required to respect the tribunal's determination of the facts unless the tribunal's evaluation was irrational or illogical it was, however, permitted to revise without restrictions the evaluation of the law to determine whether the alleged breach of the Bank constituted a breach of the concept of economic public order.[14]

3. The Court's decision

The Court held that the arbitral tribunal had committed various errors in its interpretation and application of mandatory law relating to the Bank's obligations of information and disclosure and was mistaken in its classification of the financial product as one which lacked any special complexity[15].

The Court confirmed that the award lacked the legal evaluation that constituted the basic foundation in order to determine the scope of the duties of the bank and in fact, that the legal grounds upon which the tribunal made its decision were so patently erroneous that they vitiated the reasoning provided by the tribunal.[16]

The Court decided that the erroneous analysis of the law as expressed in the reasoning of the tribunal, itself constituted an expression of arbitrariness as prohibited by the Spanish Constitution.[17] In other words, the Court held that the errors committed by the arbitral tribunal in its analysis of the law, rendered the award arbitrary, unreasoned, in breach of the fundamental constitutional rights to a defence and prohibition of arbitrariness and therefore, contrary to public order.

The Court therefore ordered that the award be set aside.

Comment

This decision has prompted serious concern amongst some in the Spanish arbitral community who fear that this decision is likely to increase the number of attempts to set aside awards and also affect the credibility of Madrid as a safe seat for arbitration. These concerns have proved founded. Since this decision, the Madrid Court has issued at least two further judgments overturning arbitral awards on the basis of public order after conducting a review of the merits of the decision of the arbitrators[18]. The second of these two later decisions contained a strong dissenting vote from the President of the Court who, amongst other things, warned against confusing the role of the Court in an action to set aside an award - which does not permit a re-examination of the merits of the dispute decided in arbitration - with the functions of an appeal court, which is authorised to undertake a complete examination of the issues decided in the first instance including with respect to both the facts and law.

Some other commentators have suggested that these disputes all related to contracts for complex financial products and that the Court's approach is perhaps unsurprising in the context of the Spanish financial crisis and strong social pressure relating to banking disputes and the alleged abuse by banks in contracts for complex financial products.

These controversial decisions were all reached by the same court, the Superior Court of Justice of Madrid. Under Spanish Arbitration Law, applications for the annulment of an arbitration award are to be made in the Superior Court of Justice of the Autonomous Community of the place in which the award was rendered[19]. There are 17 Autonomous Communities of Spain in total, and it is by no means certain that the other 16 Superior Courts of Justice will follow the same approach. While on the one hand potentially reassuring, it also adds an additional element of uncertainty.

Only time will tell what effect this decision will have. In the meantime, parties to contracts which provide for arbitration seated in Spain should keep two key points in mind. First, the concept of public order in Spain encompasses all mandatory rules and principles of contracting pursuant to Spanish and EU law and secondly, that an award rendered in Spain could be set aside on public order grounds on the basis of an error in the application of the law by an arbitral tribunal.

For further information, please contact Eduardo Soler-Tappa, Partner, Beverly Timmins, Associate or your usual Herbert Smith Freehills contact.

[1] Spanish Arbitration Law No 60/2003 (Ley 60/2003, de 23 de diciembre, de Arbitraje).

[2] Spanish Arbitration Law No 60/2003, Article 41.1.(f)

[3] See for example, Judgments of the Spanish Supreme Court (Sala Primera del Tribunal Supremo) of 15 Dicember 1987, 7 June 1990, 21 March 1991 and 4 June 1991; Judgment of the Provincial Court of Madrid (Audiencia Provincial de Madrid) of 13 October 1997; Judgment of the Superior Court of Justice of Madrid (Tribunal Superior de Justicia de Madrid) of 9 July 2013 amongst others.

[4] Article 81, Treaty on the Functioning of the European Union. See Case C-126/1997 Court of Justice of the European Union, Eco Swiss China Time Ltd v. Benetton International N.V

[5] Judgment of the Superior Court of Justice of Madrid, 28 January 2015, Nº 13/2015

[6] Judgments of the Superior Court of Justice of Madrid, 6 April 2015, Nº 7/2015 and 14 April 2015 Nº 31/2015

[7] Superior Court of Justice of Madrid, Judgment dated 28 January 2015, Legal ground No 8, page 18

[8] Specifically, Title VII of the Spanish Stock Exchange Act , Royal Decree 629/1993 of 3 May 1993 and other Spanish and European jurisprudence.

[9] Superior Court of Justice of Madrid, Judgment dated 28 January 2015, Legal ground No 8, page 18

[10] Judgment, Legal Ground 4, Pages 8-9

[11] Judgment, Legal Ground 4, Page 8 referring to Spanish Arbitration Law No 60/2003, Preamble, Part VIII

[12] “El orden público susceptible de protección ex art. 41.1.f) LA comprende tanto la tutela de los derechos y libertades fundamentales reconocidos en el Capítulo II del Título I de la Constitución, como, por imperativo incluso del Derecho de la Unión Europea, lo que se ha dado en llamar " orden público económico ", en el que se incluyen ciertos reglas básicas y principios irrenunciables de la contratación en supuestos de especial gravedad o singularmente necesitados de protección”. Superior Court of Justice of Madrid, Judgment dated 28 January 2015, Legal ground No 4, page 9.

[13] Judgment, Part VI, page 15.

[14] Judgment, Part VI, page 15.

[15] Judgment, Part VI, 2, Page 16.

[16] Judgment, Part VIII, page 18

[17] Judgment, Part VI, page 15.

[18] Judgments of the Superior Court of Justice of Madrid dated 6 April 2015, Nº 7/2015 and 14 April 2015 Nº 31/2015 respectively

[19] Article 8(5).