The annulment of arbitral awards for violation of international public policy under Spanish law

This is the third article in Clyde & Co’s latest international arbitration series covering the scope of court powers on issues or violations of international public policy across various jurisdictions. In this piece, associate Sofía Rivas and trainee Michelle Donovan from our Madrid office provides the legal perspective from Spain.

Introduction

Arbitration is one of the best known and most widely used alternative dispute resolution (ADR) mechanisms at an international level. This mechanism consists of entrusting the final settlement of a dispute to a third party, which may be an arbitrator or an arbitral institution.

It is well known that one of the most relevant characteristics of international arbitration is the importance given to the principle of "party autonomy". Even so, arbitration is not free from limitations. Specifically, one of the grounds for annulment of an arbitration award is that it is contrary to "public policy". Under Spanish law, this limitation is set forth in Article 41 f. of Law 60/2003, dated December 23, 2003, on Arbitration.

In particular, if one of the parties considers that the award is contrary to public policy, they may file an “action for annulment”. This initiates a process of external judicial control over the validity of the award which, in Spain, falls within the jurisdiction of the High Courts of Justice.

In this article, we will analyse the limitation of public policy in international arbitration, with a special reference to Spanish jurisdiction. In this way, we aim to clarify and provide a concrete perspective on this complex concept.  

Public policy concepts in international arbitration. Special mention to Spanish jurisdiction. 

First of all, one should recognise that public policy is an extremely "open" and "indeterminate" term. For its interpretation, not only international norms come into play, but also the internal regulations of each State.

Nevertheless, many arbitral tribunals have tried to frame this concept by defining it as "an international consensus as to universal standards and accepted norms of conduct that must be applied in all fora" or as "a series of fundamental principles that constitute the very essence of the State, with the essential function [...] to preserve the values of the international legal system against actions contrary to it".

In other words, public policy reflects the global consensus on international economic, legal, moral, political and social values. Among these, corruption stands out as one of the main areas of concern and development. 

Regarding Spanish jurisdiction, this concept has traditionally been interpreted in a very restrictive manner. More precisely, it has been defined as the core of fundamental rules or principles that govern the organisation and functioning of society. In this sense, we mention the Judgment of the Provincial Court of Madrid dated May 26, 2000, which ruled as follows:

"Material public policy is understood to be the set of public, private, political, moral and economic legal principles which are absolutely mandatory for the preservation of society in a given nation and at a given time (...) and from a procedural point of view, public policy is configured as the set of necessary formalities and principles of our procedural legal system, so that an arbitration that contradicts any or some of such principles may be declared as null for the violation of public policy".

Therefore, we can understand that public policy acts as a necessary and indispensable limit to the principle of party autonomy, in order to guarantee the effectiveness of the constitutional rights of citizens and the functioning of institutions. This definition can be completed by saying that it also ensures “the protection of the concepts and values inspiring the constitutionally enshrined system of social democracy”. In addition, public policy acts as a “limit that is also imposed on the arbitrator and which the latter may not go beyond, this ground for nullity constituting a jurisdictional control of that limit in order to ensure that arbitration decisions respect that set of indispensable values and rights". (Judgment of the Provincial Court of Valencia, dated February 6, 2002).

The action for annulment of arbitral awards under Spanish Jurisdiction 

As a member of the European Union, Spain is subject to EU law, and therefore to the rulings of the CJEU. This court has also ruled on what should be understood by "public policy". 

In particular, the CJEU has adopted a firm position on the matters which it is considered to be "fundamental" and "essential" to preserve. Specifically, it has ruled that arbitration awards may be annulled for lack of public policy when their content (i) is contrary to competition law; or (ii) contravenes the rules on unfair terms in consumer contracts (Directive 93/13/EEC).

In Spain, it is settled law that an arbitration award cannot be reviewed on the merits and that it is not the national courts’ task to correct the arbitrators' hypothetical errors.

Specifically, the Judgment of the High Court of Justice of the Basque Country dated April 19, 2012, stipulated that the cause of annulment of arbitral awards by judges must have “a reduced role that limits its operability, in congruence with its nature, to truly exceptional cases” and this "is only possible on the basis of a limited conception of public policy”.

Along these lines, the Judgments of the High Court of Justice of Madrid dated May 21, 2013, and April 21, 2015, as well as the Judgment of the High Court of Justice of Murcia of March 10, 2014, have recognised that “the concept of public policy cannot become a trap door to allow the control of the substantive decision adopted by the arbitrators”.

More recently, the Judgments of the High Court of Justice of the Canary Islands of March 10, 2021, and of Castilla-La Mancha of March 22, 2021, have stated that the safeguarding of public policy cannot “imply that the judges hearing the annulment of the arbitral award replace the criterion reached by the arbitrator. In addition to the fact that the notion of public policy cannot be taken as a power of veto (…) that allows the control of the arbitral decision”.

As can be seen, Spanish case law has sought to limit the control of judges over arbitral awards, limiting their work to tasks of support, assistance and external control (Supreme Court Judgment of June 22, 2009).

Recent Spanish case law 

To explore this matter further, it is worth referring to the most recent Spanish judgment on this issue, namely Constitutional Court Ruling No. 17/2021 of March 22, 2021, (EDJ 2021/510947), which analyses a decision of the Supreme Court (SC) that annulled an arbitration award. According to the SC decision, the award did not comply with the right to effective judicial protection (Article 24 of the Spanish Constitution) and was therefore contrary to public policy. The SC based its decision on the following grounds:

• Failure to state reasons.
• Failure to assess evidence.
• Failure to rule on all the issues raised in the arbitration.

The SC's decision was appealed before the Spanish Constitutional Court, which found that the ruling had erred in deciding to annul the award, as it did not violate public policy.  In particular:

• Arbitral awards should be considered final decisions, and therefore judicial review of awards should be kept to a minimum.
• For the award to be declared null and void, it must be “arbitrary, illogical, absurd or irrational”.
• The role of the court at the annulment stage is not to replace the arbitrator in the resolution of the dispute, as no new analysis can be made of issues that have already been decided.
• The fundamental role of the tribunal is to verify that the arbitrators have respected due process and procedural guarantees.

Conclusion

As can be seen, the concept of public policy is still subject to interpretation, as there is still no settled or unanimous definition of it.   However, the Spanish courts have shown an increasingly "pro-arbitration" trend, especially following the recent Constitutional Court's ruling of March 22, 2021.  In this way, Spain is positioning itself as a country in favour of treating arbitral awards as final decisions, limiting the actions of judges to external control, and therefore guaranteeing minimal intervention.

This series will continue to run over the coming weeks.