Global Development

Introduction

In a landmark decision released on 15 June 2020¹, the Spanish Constitutional Court has significantly limited the scope of the concept of public policy for the purposes of setting aside arbitral awards in Spain.

The long-awaited ruling has reassured the arbitration community, which had expressed concerns on a potential weakening of the support of the judiciary to arbitration, following several recent Madrid High Court decisions² which had dangerously widened the concept of public policy as a reason for annulment of awards.

Background of the case

This domestic case related to a civil lease contract submitted to institutional arbitration (AEADE), in which the Spanish landlords filed for arbitration for unpaid rents. The award declared the lease’s termination, and ordered payment of the outstanding debts and the eviction of the Spanish tenants.

The tenants initiated actions to set aside the award before the Madrid High Court arguing that the arbitration agreement was abusive and contrary to the consumer protection legislation.

Shortly thereafter, the parties informed the Court that they had settled the dispute and requested the termination of the annulment proceedings. Upon inaction of the Court, who ignored such joint petition and continued with the proceedings, they reiterated their lack of interest in the annulment proceedings by not appearing before the Court when summoned for a hearing.

Finally, the Madrid High Court issued a decision on 4 April 2017³ rejecting the parties’ request for abandonment of the proceedings as it considered that ‘there was a general interest in purging those awards that are contrary to public policy’. In other words, parties are not entitled to settle the dispute when the annulment of the award involved public policy issues because it is out of the reach of party autonomy. However, and as the Constitutional Court will later highlight, it is noteworthy to mention that the Court did not support its finding in any specific provisions of the Spanish procedural or arbitration law.

The parties sought constitutional protection against this decision before the Constitutional Court, claiming that the Madrid High Court’s judgment was not only arbitrary but also undermined their freedom of choice to settle the dispute and infringed their right to judicial protection.

The Constitutional Court’s findings

The interest of the Constitutional Court’s ruling is twofold.

• The refusal of the Madrid High Court to terminate annulment proceedings upon agreement of the parties is unreasonable and against the parties’ constitutional rights.

According to the Court, the contested decision made ‘an extensive and unjustified interpretation of the concept of public policy’ when it rejected the parties’ joint request for the withdrawal of proceedings.

This being, the Constitutional Court agrees with the Madrid High Court in considering that when public interest is involved, parties cannot freely terminate a judicial proceeding.

However, the Constitutional Court understands that such element is not present in civil and commercial proceedings, in which pursuant to Article 19 of the Spanish Civil Procedural Law the parties are free to initiate actions, determine the object of the proceedings, and put an end to them as they deem fit and when they deem fit, provided that the legal relationship in question responds only to a subjective-private nature.

Interestingly, the Constitutional Court holds that regardless of whether or not the grounds for the annulment of the award affected public policy, the underlying dispute was of a private nature, and therefore within the reach of party autonomy. As the Court declared, in the Spanish civil and commercial procedural system, ‘as is the process of annulment of the arbitration award … for there to be a judicial decision, the parties must demonstrate an interest in litigating.’

According to the Constitutional Court, the Madrid High Court ruling incurs the mistake of considering that the purpose of the party’s abandonment of proceedings was based on their agreement on the object of the annulment proceedings in which public policy grounds were invoked (this is to say, that the parties had agreed on whether or not the award violated public policy). On the contrary, it is obvious to the Constitutional Court that by requesting the termination of proceedings, the parties informed the Madrid High Court of their lack of interest in pursuing that piece of litigation, having obtained an out of court agreement in relation to the patrimonial obligations recognized in the award, whose private nature was never discussed.

In the Constitutional Court’s view, ‘the contested decision is, to say the least, unreasonable’ and violates the right to effective judicial protection and effective protection in the exercise of legitimate rights and interests provided for in article 24.1 of the Spanish Constitution.

Such unjustified interpretation of public policy prevented the appellants from exercising their right to terminate annulment proceedings, which is incompatible with their constitutional protected rights.

• The need for a restrictive interpretation of public policy in the context of arbitration.

Referencing several of its previous decisions⁴ and European Court of Justice caselaw (e.g. Case C-168/05, Mostaza Claro⁵), the Constitutional Court recognizes that, as envisaged in the Spanish Arbitration Act, the annulment proceedings must be interpreted as an external control of the award and shall not include a review of the merits of the case.

The Court also acknowledges that ‘the ultimate purpose of the arbitration, which is no other than to reach an early extrajudicial solution to a conflict, would inevitably be distorted in the event that the arbitration decision could be subject to revision on the merits by the courts’.

The judgment further provides for a definition of public policy (‘the fundamental rights and freedoms guaranteed in the Constitution, as well as other essential principles that the legislator need to observe due to constitutional requirements or the application of internationally accepted principles’) which is consistent with the international notion of public policy.

The Constitutional Court also alerts of the risk that the blurry limits of public policy could be used ‘as a mere pretext by the courts to re-examine the issues debated in the arbitration proceedings, distorting the arbitration institution and ultimately violating the free will of the parties’.

Thus, the Constitutional Court (i) rejects the extensive concept of public policy championed by the Madrid High Court, (ii) restates that the review of the case ‘essentially belongs only to the arbitrators’; and (iii) concludes that ‘the broadening of the concept of public policy made by the contested judicial decisions … goes beyond the scope of the annulment action and despises the principle of party disposition.’

Conclusion

The essence of the judgment can be summed up in three ideas:

1. the full endorsement by the Constitutional Court of the principle that the merits of the dispute belong only to the arbitrators;
2. the confirmation that the broadening of the concept of public policy has no place in the annulment proceedings in Spain and is not compatible with its constitutional principles; and
3. the acknowledgement that parties are free to settle annulment proceedings even when public policy is alleged as ground to set aside an award.

In short, this decision can only be interpreted as a clear and firm recognition by the highest interpreter of constitutional matters in Spain of the value of arbitration and the need to respect arbitral awards.

---

---