Dispute Escalation provisions and International Arbitration – a rising threat in Spain?

This is the final article in Clyde & Co’s latest international arbitration series covering dispute escalation provisions and pre-action ahead of commencing arbitration across various jurisdictions. In this piece, associate Bea Hockton from our London office provides the Spanish legal perspective.

For now, Spanish procedural law does not impose any mandatory pre-action conduct. However, this is currently under review and a bill on procedural efficiency (“La Ley de Eficiencia Procesal del Servicio Público de Justicia”) has been approved by the Council of Ministers and is now in the parliamentary process. If passed, this law is expected to make it compulsory for parties to engage in ADR before commencing proceedings.[1]

Escalation clauses

A standard way to provide for a pre-action protocol through an agreement is to include an “escalation clause” or “multi-tier dispute resolution clause” in the contract. Such clauses provide a gradual approach to the resolution of conflicts, typically obliging the parties to progress through different phases or steps such as negotiation, dispute boards and mediation before commencing an arbitration. These are becoming increasingly common in Spain, especially in construction and engineering contracts.

Validity of escalation clauses

Since there is no specific legislation regulating pre-action conduct in Spain, the status of this type of clause is governed by the principle of freedom of contract, (“el principio de la libertad de contratación”) and the pacta sunt servanda doctrine that agreements must be kept.

The validity of escalation clauses is recognised under Spanish law, provided they are drafted in a way that is unambiguous. In order to avoid any uncertainty, these clauses should clearly set out the steps to be followed (for example, negotiation, mediation and arbitration); the rules and limitations to be observed at each step; the minimum period of time within which to carry out each step; when time limits start to run (for example, from the moment in which the mediator is nominated); and the process for notifying the parties that each step has been completed. It is also important to note that, pursuant to Article 17.4 of the Spanish Arbitration Act, the arbitrator must not have acted as a mediator in the same dispute unless otherwise agreed by the parties.

The Spanish Arbitration Act does not include any model escalation clauses. It is therefore recommended that contract drafters take into account the model clauses in the IBA Guidelines,[2] whose validity is unlikely to be contested pursuant to Spanish law. It is also recommended to consult the rules and bylaws of the principal Spanish arbitral institutions: the Corte Española de Arbitraje, the Corte de Arbitraje de Madrid, and the Corte Civil y Mercantil de Arbitraje.

Effects and sanctions

National law does not impose specific penalties on parties failing to comply with compulsory escalation clauses, given constitutional concerns that they might violate the principle of effective judicial protection (“el postulado de la tutela judicial efectiva”).

There is also no clear Spanish precedent concerning the consequences arising from the breach of an escalation clause; namely from commencing domestic proceedings or arbitration without having participated in or concluded the steps required by the escalation clause.  However, the arbitral institutions in Spain are obliged to review the prima facie existence of an arbitration agreement prior to the formation of the arbitral tribunal.[3] It seems likely, therefore, that any objections related to an escalation clause would be dealt with at this stage.

If the court finds that an arbitration agreement may exist, it will continue with the arrangements for the arbitration proceedings, without prejudice to the admissibility of any objections that might be pleaded.  The prevailing view is that any decision as to the jurisdiction of the arbitrators shall be made by the arbitrators themselves.[4] If, on the other hand, the court does not find prima facie that an arbitration agreement may exist, the prevailing view is that it will notify the parties that the arbitration cannot continue.