Josef Fröhlingsdorf [1]
1. Introduction
The scope of intervention of the local courts in arbitration, specifically regarding the annulment of awards, is important for the election of a seat of arbitration.
In the last years, there was a certain confusion caused by disputed resolutions
of a local court in Madrid which continously annuled arbitral awards rendered in Madrid on the base of a supposed infringement of public order.
However, this confusion has been clarified by 5 recent decisions of the Spanish Constitutional Court.
2. Competent Court for the Annulment of arbitral Awards
The competent Court for the annulment of an arbitral award is the Superior Court of Justice (Tribunal Superior de Justicia - TSJ) of the respective Autonomous Community (Comunidad Autónoma), where the seat of the arbitral proceeding is located, in total 17 in Spain.
The decisions of these TSJ are final and binding, no recourse is possible. There is also no court competent for the unification of different criteria TSJ may have.
However, up to now, in practice, the problem we will comment later only arose in Madrid and not in any other TSJ of Spain.
3. The Problem of the Past
In the last years, the TSJ of Madrid (TSJM, a tribunal composed of three judges) annuled several arbitral awards alleging a violation of the public order due to a lack of appropriate motivation or reasoning of the award, using the TSJM this argument in order to enter into a review of the base of decision of the award, acting in practice like a second instance. This was even done in those cases, where the parties unanimously withdrew from the annulment proceeding, considering the TSJM the withdrawal as irrelevant as, according to its understanding, public order was affected.
4. Amparo Appeal before the Constitutional Court
Several parties affected by the decisions of the TSJM, considering the fact that no recourse is possible against the decision of the TSJM, presented the so called Recurso de Amparo (Amparo Appeal) before the Constitutional Court, alleging a violation of their constititional rights to obtain justice, guaranteed in Art. 24 of the Spanish Constitution.
The Amparo Appeal is not a formal recourse against the decision of the TSJ Superior Court of Justice, but a specific appeal related to constitutional rights.
In practice, normally most of the Amparo Appeals are even not admitted for procedural reasons and before entering the Constitutional Court in any analysis of the material aspect of the appeal. The fact that the Constitutional Court admitted for further analisis the application of several appeals in relation to the annulment of arbitral awards was already interpreted as a positive indication, which was later on confirmed by the decisions, adopted at the end by the Constitutional Court, since June 15, 2020. Up to now, already 5 decisions of the TC confirmed that the argumentation of the TSJM was not in accordance with the Spanish Constitution and violated the constitutional rights of the appealing parties.
The Constitutional Court confirmed the institution of arbitration, clarified the function of the judicial bodies in relation to the annulment of arbitral awards and stated the limited scope of intervention rights of the ordinary courts in this respect.
5. Recognition of Arbitration by the Constitutional Court
The Constitutional Court confirms arbitration as a jurisdictionary equivalent to judicial proceedings as arbitral awards have a res judicata effect and are enforcable, which is based on art. 24 CE.
Arbitration has to be considered as a heteronomous mechanism for dispute resolution with a minimal intervention of the ordinary courts, based on and resulting from the parties autonomy according to art. 1.1 and 10 CE.
Having the parties agreed to arbitration, there are limited possibilities for the ordinary jurisdiction to intervene, basically the annulment proceeding and no other proceeding which would allow to enter again in an evaluation of the base of the dispute.
The annulment proceeding is an external control mechanism which, however, does not permit a review of the base or ground of the decision made by the arbitrator.
6. Public Order and Arbitration
According to art. 41.1 (f) of the Spanish Arbitration Act, an infringement of public order is a cause for the annulment of an award. Given the fact that there is no legal definition of the concept of public order, there is always the risk that this concept is used as an instrument for the court to reexamine the base of the dispute entering into the discussion held in the arbitral proceeding, violating, however, the parties autonomy, which decided to have the resolution of the dispute to be made by the arbitrator and not by the ordinary judge.
The Constitutional Court states that the public order comprises all of the fundamental rights and all of the liberties guaranteed by the Spanish Constitution, as well as all of the basic public and private legal, political, and economical principles, which are binding for the maintenance of the society and in a certain time. This comprises also the formalities and the procedural principles.
Only an arbitral award which infringes these basic principles can be considered to violate the public order and the TSJ has to make sure that this limitation is respected.
According to the Spanish Jurisprudence, there is also the concept of an economical public order (orden público económico), which is defined by the Spanish Supreme Court as the set of all of the mandatory rules in the contractual relationships regarding the economical organization of the social relations and the internal economy of the contracts, which includes a certain obligation to protect the weaker party of a contract. This imposes for example financing institutions the obligation to carefully define the customer profile and to give all the necessary information to the client requiered in consideration to its personal profile.
7. Motivation / Limitation of the Scope of judicial review of awards
The duty of reasoning or motivation of the award results from Art. 37.4 of the Spanish Arbitration Act and is not part of a constitutional fundamental right or, in other words, is not part of the public order. As arbitration is based on the parties autonomy, the duty for reasoning follows own parameters, defined according to art. 10 CE, and which have to be determined by the parties to the arbitration themselves.
The Constitutional Court confirms that the scope for judicial review of arbitral awards on public policy grounds is extremely small and limited to the verificaction whether the fundamental procedural guarantees have been respected. With this understanding, the TSJ can only exceptionally annul awards on public policy grounds when
(i) fundamental due process principles have been breached,
(ii) the award lacks any reasoning or has one reasoning that is arbitrary, illogic, absurd or irrational,
(iii) imperative legal rules have been breached or
(iv) the invariability of a previous final decision has been infringed.
It is therefore unlawful to annul an award only because the TSJ considers that the conclusions reached by the arbitral tribunal are mistaken, not adequate, not correct or insufficient or because the court would have reached a different decision. The TSJ is not entitled to review the substantive matter or assess the evidence, legal reasoning or conclusions reached by the arbitrator and the annulment action cannot be used, de facto, as a second instance aimed to review the award.
In other words, the possible judicial control of the arbitral award and its conformity with the public order cannot lead to the consequence that the court substitutes the arbitral tribunal in its function to apply the law and it can also not be a second instance reviewing the facts, the evidence taken and the application of the law, nor can it act as a control mechanism for the correct application of jurisprudence.
8. Relevance of the Parties decision to withdraw from the annulment procedure
The Constitutional Court confirms the right and possibility of the parties to withdraw from an annulment proceeding if both parties agree and no third party rights are involved. This results from the disposition power the parties have in a civil proceeding like the annulment proceeding. Therefore, the court cannot allege its duty to protect public order and general interest in order to reject the parties decision to withdraw as there is no public or private interest affected by the withdrawal.
The parties are free to start and to terminate a civil proceeding provided that no third party right is affected and any court has to respect this.
In a recent decision (January 19,2021), the TSJM already took into account the ruling of the Constitutional Court as to the wihtdrawal of the parties from the annulment proceeding, up to now there is no information as to a new decision regarding public order and motivation.
9. Conclusion
The recent decisions of the Spanish Constitutional Court clarify the scope of intervention or competence and the limits of the tribunal when analyzing the set aside application, resolving the doubts which resulted from some unfortunate decisions of the Madrid Superior Court of Justice. The Constitutional Court confirms the role of Arbitration as an equivalent to the ordinary justice and underlines that the judge deciding in an annulment proceeding has to respect the parties´autonomy for both the initiation as well as the termination of any civil proceedings.
There are still some Amparo Appeals pending for decision in relation to annulment proceedings, but the Spanish Arbitration community is confident that the next decisions of the Constitutional Court will confirm the clarification already expressed, which implies a strong support for Spain and particulary Madrid as seat of intermational arbitration.
1- International Arbitrator and Founding Partner of FRÖHLINGSDORF ABOGADOS ASOCIADOS, S.L.P.