To arbitrate or not to arbitrate – The pertinent question for non-signatory third parties - Spain

This is the first article in a series which explores the key considerations for non-signatory third parties in relation to arbitration agreements. Clyde & Co’s European international arbitration teams have prepared various jurisdictional perspectives and this first piece is written by associate Marta Cerrada, an associate in the Madrid office.

Arbitration is the result of contracting parties’ voluntary decision to resolve disputes that arise with respect to a particular legal relationship according to the decision of an arbitrator or arbitral tribunal. This agreement between parties to submit to arbitration is set out in what is known as an arbitration agreement, which, like any contract in Spain,[1] is typically binding only on the parties that sign it.

However, as explained below, the Spanish Courts (the Courts) have allowed arbitration agreements to extend to non-signatory third parties in certain cases. However, the relevant criteria for doing so is quite restrictive and must be applied with caution, taking into account the particular circumstances of the case. As a result of this restrictive position, it is often difficult to determine the most appropriate approach under Spanish law in cases where one of the co-defendants is not a party to the arbitration agreement.

The aim of this article is to provide an overview of the legislative framework and the position of the Courts in order to clarify the specific circumstances that should be considered when deciding whether to arbitrate against a non-signatory third party.

The extension of the arbitration agreement and the attractiveness of the jurisdiction

The Spanish Arbitration Act (SAA) follows the UNCITRAL Model and, as such, does not contain a specific provision for the extension of the arbitration agreement to non-signatory third parties. However, the SAA does provide that the arbitration agreement must "be in writing, in a document signed by the parties" and "express the will of the parties to submit all or some disputes to arbitration" (Article 9).

The Courts, applying the European Community doctrine, consider that for there to be a valid and binding arbitration agreement where parties waive access to a jurisdiction, it is necessary that such waiver is "explicit, clear, definite and unequivocal" (Ruling No. 65/2009 of the Constitutional Court, of 9 March -RTC 2009/65- and Ruling No. 409/2017, of the Supreme Court, of 27 June -RJ 2017/3021-).

The Courts, while recognising this doctrine, have acknowledged the possibility of extending the arbitration agreement to non-signatories.  However, this requires an analysis of the common will of the parties, including that of the non-signatory, to identify the explicit, clear, categorical and unequivocal intention of all parties to be subject to the arbitration agreement. The Courts have identified this common intention in the following cases:

1. The Courts have accepted the possibility of extending the arbitration agreement to financial institutions guaranteeing obligations in a contract subject to an arbitration agreement (Ruling No. 404/2005, of the Supreme Court, of 26 May -RJ 2005/4140- and Ruling No. 64/2015, of the High Court of Justice of Madrid, of 16 September -JUR 2015\242481-). In these cases, it was essential for the Courts that the guarantee contract signed with the financial entity did not include any other choice of dispute forum.

2. A non-signatory third party may be bound by the arbitration agreement if it has been involved in the execution of the contract. In these cases, the Courts have stated that, to the extent that it was involved in the execution of the contract, the non-signatory party’s refusal to submit to arbitration will contradict its prior acts.(Ruling No. 20/2018 of the High Court of Justice of Madrid, of April 24; and Order No. 22/2018 of the High Court of Justice of the Basque Country, of November 7 -RJ 2018/5890-).

3. The insurance company of one of the signatory parties may be bound by the arbitration agreement signed by its insured if the insured subrogates its contractual position to the insurer after an indemnity under the policy has been paid (Ruling No. 1097/2008, of the Supreme Court of 20 November -RJ 2009\8- and Ruling No. 64/2003, of the Supreme Court, of 6 February -RJ 2003/850-). However, the Courts have clarified that the arbitration agreement cannot bind insurers in cases where a third party initiates legal proceedings against both the insured and insurer in exercise of the “direct action” provided for in Article 76 of the Spanish Insurance Contract Act.

4. Arbitration agreements may extend to non-signatories in cases of contractual assignments, provided that such assignments have been accepted both by the original contracting parties and the assignee (Ruling No. 60/2013, of the High Court of Justice of Madrid, of 22 July -JUR 2013/284880-).

5. In some cases, the arbitration agreement bound non-signatory companies belonging to the same corporate group. In these cases, the Courts have been prepared to pierce the corporate veil on the basis that there was bad faith or an abuse of rights.  The Courts have also made decisions to determine the company that executed the relevant contract (Ruling no. 8/2007, of the Provincial Court of Barcelona, of February 13 -JUR 2007\204898-; Ruling No. 227/2010, of the Provincial Court of Madrid, of October 15 -JUR 2011\37153-; and Ruling No. 13/2015, of the High Court of Justice of the Valencian Community, of May 5 -RJ 2015/4994-).

However, there is an abundance of judgments in which the Courts have refused to extend arbitration agreements to a non-signatory, despite the fact that the non-signatory participated in the disputed legal relationship, on the grounds that such participation was not sufficient to break the principle of the ‘relativity’ of the arbitration agreement.[2]

Given the wide variety of cases, it is difficult to give a simple answer to the question at the beginning of this article, even though it arises quite often in arbitration practice.  It is therefore advisable to dispense with rigid rules and to examine the circumstances of each case carefully, looking for evidence of whether the non-signatory had the explicit, clear and unequivocal intention of being bound by the arbitration agreement.  Only where that can be proved is it advisable to initiate a single arbitration involving all the parties – including the non-signatory.

Where this cannot be proved, and so a single arbitration is not possible, the position is somewhat complicated.  To deal with this problem, the Courts have developed the jurisdictional doctrine of vis atractiva, which allows an arbitration agreement to be overridden (contrary to the provisions of Article 11 of the SAA[3]) and all parties to be subject to a single set of court proceedings.  However, the doctrine only permits this where there is an imminent risk of contradictory pronouncements in arbitral and jurisdictional venues (Ruling no. 79/2018, of the Provincial Court of Navarra, of February 19 -JUR 2018/244944-; Ruling no. 177/2012 of the Provincial Court of Madrid, of July 2 -JUR 2012/289937-; and Ruling no. 82/2002, of the Provincial Court of Gipuzkoa, of February 26 -JUR 2002/219608-).

Although judges sometimes refuse to take advantage of this doctrine,[4] in practice, it has led most Courts to favour court proceedings over arbitration where there is a clear risk of contradictory rulings. As a result, objections raised by signatory parties have been rejected and some Courts have recognized their jurisdiction to hear the case against them despite of the arbitration agreement.

Conclusion

In summary, the extension of an arbitration agreement to non-signatories is the exception in Spain, not the general rule. The Courts are reluctant to view non-signatory third parties as bound to an agreement and only take that view where the third party has demonstrated an unequivocal intention to waive access the courts’ jurisdiction.  Moreover, a high standard of proof is required to demonstrate such an intention.

That said, the Courts do sometimes allow an arbitration agreement to be extended to third parties in exceptional cases, on different legal bases. For example, arbitration agreement may extend to non-signatories where the non-signatory belongs to the same group of companies as one of the contracting parties and has participated in the execution of the contract or, alternatively, where the contract has been assigned.

Closely linked to the above, the Courts have developed the jurisdictional doctrine of vis atractiva to deal with those cases where there is no legal basis for extending an arbitration agreement to non-signatory third parties. Here the court allows all claims and parties in a dispute to be subject to a single set of court proceedings, but only if there is an imminent risk that separate arbitral and court proceedings might result in an award and judgment that contradict each other.

This series will continue next week with our second article on the French law perspective and considerations for non-signatory third parties to arbitration agreements.