The Amendment of Spain’s Arbitration Act: A Promising But Unfinished Agenda

By Guillermo Bayas Fernández
Attorney-at-law in Spain
Fundación Rafael del Pino scholar
NYU LL.M. Candidate, Class of 2011

Abstract

Last September, the Spanish Government sent to the Parliament a bill (the Bill) to reform the current Spanish Arbitration Act (Ley 60/2003, de 23 de diciembre, de Arbitraje), which is now being discussed in Congress. The Bill improves different aspects of the existing regulation, mainly those concerning the action to set aside the award, arbitrators’ liability, arbitration of corporate disputes and the effect of insolvency proceedings on arbitration agreements. However, the possible suppression of dissenting opinions prejudices arbitration and the regulation on challenge of judicial jurisdiction favors frivolous attempts to avoid abiding by arbitration agreements. respective  Additionally, the proposed assignment of functions among judicial bodies in arbitration issues lacks coherence and does not create a long-demanded unification appeal on arbitration matters. While this article welcomes some of the intended modifications, it raises concerns that Spain might be losing a unique opportunity to adopt a modern regulation that would advance its chances of becoming a prime international arbitration seat.

I. Introduction

Last September, the Spanish government submitted to the Congress – the lower chamber of the Spanish Parliament – a bill (the Bill) to reform the current Spanish Arbitration Act (Ley 60/2003, de 23 de diciembre, de Arbitraje). This article examines the intended modifications through an international perspective. I will start by briefly discussing the origins of the current Spanish Arbitration Act and how it adapts the UNCITRAL Model Law. In the next section, I study the main changes in the reform, leaving the ones concerning judicial competence on arbitration issues for the last section. Finally, I will address how to improve the current regulation. Specifically, I propose a scheme for judicial competence on arbitration issues, which includes a unified appeal for such issues.

II. The Arbitration Act and its need for an update

The enactment of the Arbitration Act (AA) in 2003 was a real breakthrough for arbitration in Spain. The AA is based on the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law) but, unlike in other Spanish speaking countries (e.g. Mexico and Chile), Spain’s law does not mirror the text of the Model Law word for word. Instead, it encompasses internal as well as international arbitrations, and both commercial and non-commercial disputes. Moreover, the AA includes provisions that differ from the UNCITRAL text, such as those describing the constitution of the arbitral tribunal, the challenge of arbitrators and the arbitration proceedings. Finally, the AA reflects the influence of other sources, such as the French and Swiss arbitration acts or the ICC Rules of Arbitration.

Nevertheless, with the increasing use of arbitration in Spain in the last years, several flaws in the AA have emerged that need to be addressed. Moreover, the Spanish authorities are committed to promoting arbitration and other means of alternative dispute resolution with a focus on speed and efficiency. As a matter of fact, the amendment of the AA is accompanied by another bill that introduces mediation in civil and commercial cases, in an effort to reduce litigation in Spanish courts.

III. Main aspects of the reform

The proposed amendment of the AA introduces relevant changes, some of which are a step forward, while others are difficult to understand, to say the least. Apart from the changes related to competence on arbitration issues, which I discuss in the next section, the following changes warrant closer examination.

  1. Action to set aside the award.
  2. Challenge of jurisdiction based on the matter having been submitted to arbitration.
  3. Mandatory insurance for arbitrators.
  4. Arbitration of corporate matters.
  5. Effect of insolvency proceedings in arbitration agreements.
  6. Public institutions’ arbitration.
  7. Limitation of dissenting opinions.

1. Action to set aside the award

The reform includes three positive changes.

a)     Until now, the AA provided for a mandatory hearing before the court decided on the annulment, regardless of the parties’ opinion, which delayed the decision and was often futile, as counsel would often just repeat what they had said in their written statements. The amendment establishes that a hearing will only be scheduled if both parties ask for it, thus speeding the procedure.

b)    When the action for setting aside is based on the ground that the arbitrators have decided questions not submitted to their decision (art. 41.1.c AA), the claiming party shall first submit the question to the panel within 10 days of the issuance of the award. This will give the arbitrator(s) an opportunity to correct the mistake before the party files the judicial action, which will help reduce litigation.

c)     The ground for annulment based in the current text on the award being “in conflict with public policy” would now demand that the award be “manifestly in conflict with public policy,” therefore limiting the abuse of this reason to challenge arbitral awards.

2. Challenge of jurisdiction based on the matter having been submitted to arbitration

Challenges to the jurisdiction of a court on the basis of the dispute having been submitted to arbitration will no longer be filed by the defendant within 10 days from service of the claim, but within the time given to file the statement of defense, which is longer (20 days). Once the challenge has been filed the court will stay the proceedings and schedule a hearing before taking a decision. This is due to the fact that the Government does not consider the challenge as an objection to jurisdiction stricto sensu, but rather as a procedural obstacle (excepción procesal).

The legal rationale for the change is not compelling since, according to a majority of authors, the agreement to arbitrate deprives the courts of jurisdiction to adjudicate the claim, and hence the challenge should be treated as a real objection to the court’s jurisdiction. But aside from this argument, what is clear is that the amendment lengthens the duration of the challenge process, both through the longer time period to file the challenge as well as the mandatory hearing. To avoid such undue delay, the hearing should be left to the judge’s discretion upon request of one of the parties, as the submission to arbitrate is often clear and there is no need to produce any evidence to assess it (apart from the document containing the arbitration agreement), rendering a hearing inutile.

To sum up, even if the challenge does not prevent the initiation or continuation of the arbitral proceedings, this amendment introduces uncertainty in the arbitration process and incentivizes parties to take their claims to the courts even when their contract is explicitly subject to arbitration. We cannot welcome such inefficient change at all.

3. Mandatory insurance for arbitrators

The reform demands that arbitrators have insurance to cover whatever damages they cause the parties by reason of bad faith, recklessness or willful misconduct. This is a positive innovation, since it constitutes a guarantee for anybody reluctant to resort to arbitration as a means of dispute resolution, putting arbitration on a level with judicial litigation, where judges’ liability is covered by the State.

4. Arbitration of corporate matters

The Bill eliminates any doubts that may exist regarding the arbitrability of corporate disputes, providing that companies’ by-laws may establish the possibility of deciding the challenge of a social agreement through arbitration. Such a provision will be laid out either in the original by-laws or by way of an amendment agreed upon by all the shareholders. In short, this is a positive step that buttresses legal certainty.

5. Effect of insolvency proceedings in arbitration agreements

In the current text of the Spanish Insolvency Act (Ley 22/2003 Concursal), arbitration agreements are deemed void and without effect during insolvency proceedings. In contrast, the reform measures state that arbitration agreements will not be affected by the declaration of insolvency, a measure undoubtedly beneficial for arbitration practice. As a consequence of this change, actions related to the existence or quantity of a credit subject to an arbitration agreement would have the benefit of being solved through a separate arbitral procedure, whereas those that have to be decided on the courts would be dealt with within the insolvency proceedings.

6. Public institutions’ arbitration

The Bill introduces a mandatory arbitration system to decide in relevant disputes between certain public bodies of the Spanish state administration, putting an end to a loophole in Spanish laws that was ordinarily filled by a de facto (that is, ad hoc and non-regulated) regime. The regulation empowers an ad hoc governmental commission to deal with such disputes. While this reform makes sense, it concerns more administrative matters than arbitration, and thus an amendment to the AA does not seem to be the proper occasion to introduce it.

7. Limitation of dissenting opinions

The most surprising change proposed by the Government is the elimination of the reference to dissenting opinions in section 37 AA. The Bill does not expressly forbid them, but where the AA said that “The award shall be made in writing and be signed by the arbitrators, who might express their dissenting opinion,” it would now just say “The award shall be made in writing and be signed by the arbitrators,” which could be construed as an implicit prohibition of opinions different than the one sustained by the majority of the panel.

If the intent of the Government is to eliminate dissenting opinions, it should reconsider such idea. From the arbitrators’ perspective, dissenting opinions allow them to express their particular criterium on a legal matter, thus preserving their dignity and reputation before the arbitration community, if not their possible liability in cases of a manifestly illegal award pursuant to section 21 AA. From the point of view of parties, such opinions are sometimes the way of confirming that their case, even if it has not prevailed, has been fully taken into consideration. For the development of arbitration in general, dissenting opinions furnish arguments that may in the future develop into generally accepted legal doctrines.

While they are sometimes criticized on the grounds that they open the door to an action to set aside the award, and are almost always written by party-appointed arbitrators in favor of the party that designated them, dissenting opinions are positive and should not be eliminated. After all, many international arbitral institutions provide for them in their Rules (ICSID, rule 47.3) or otherwise admit them when they do not expressly regulate them (ICC, LCIA). We will have to see if the legislative process clarifies the situation as to the permanence of dissenting opinions in section 37 AA, but three different political parties in Congress have already objected to this change.

IV. Competence of the courts in arbitration matters: a great opportunity

The Act confers competence on the Superior Court of Justice (Tribunal Superior de Justicia, TSJ) of each region to decide on the exequatur of foreign awards, as well as on the action to set aside the award and the appointment of arbitrators. These changes deserve individual treatments.

a) Exequatur of foreign awards

While the main statute dealing with civil procedural issues in Spain is the Civil Procedure Act of 2000 (CPA 2000), the recognition and enforcement of foreign arbitral decisions in Spain is still regulated by the Civil Procedure Act of 1881 (CPA 1881), which until recently empowered the Supreme Court (the top of the Spanish judiciary) to deal with exequatur. Due to the Court’s workload, enforcing a foreign award could take many years. Thus, international arbitration practitioners were relieved when the legislature decided to change this attribution, only to learn that the First instance courts (the lowest in the judicial pyramid) were empowered in its place, and that the amendment did not provide for an appeal to their decision. Despite widespread criticism of the reform, it was approved in 2003, and quite predictably in the years since we have witnessed a dismaying variance of judicial criteria regarding the enforcement of foreign awards. Not even when the CPA 1881 was amended in 2009 to confer competence to the Commercial courts when the foreign award dealt with certain commercial disputes did the legislature take the opportunity to introduce a more rational regulation.

With the described situation, I welcome the amendment of CPA 1881 to confer competence to the TSJs on the exequatur of arbitral decisions, as there are only 13 TSJ in the country, compared to hundreds of First instance and Commercial courts, and this will certainly bring uniformity to the Spanish regime on the subject.

However, it is somehow surprising that the Bill does not grant competence to the TSJs for the exequatur of foreign judicial decisions as well. To be sure, the exequatur of foreign awards is not identical to the exequatur of foreign judgments, as the first is subject in Spain as in most countries to the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards. But the procedure laid down in CPA 1881 is the same for both, and the issues and legal considerations courts face when dealing with them are certainly similar. All in all, it would seem wise to empower the same courts to hear both kinds of exequatur.

b) Action to set aside the award

The proposal to transfer the competence on the annulment action from the Provincial Courts to the TSJs seeks the same purpose of uniformity (there are 50 Provincial Courts in Spain, some of them having different sections with potentially different legal views). Some authors have expressed concerns on the change, since the Provincial Courts have well trained justices who have already gained considerable expertise regarding the set-aside action. However, given the overall benefit of concentrating jurisdiction on arbitration matters in a few judicial bodies, I think the change deserves praise.

c) Appointment of arbitrators

Finally, the Bill assigns competence on the appointment of arbitrators (when the parties do not agree on this issue) to the TSJs as well, to the detriment of First instance courts as we saw with the exequatur.

This means that arbitration matters would be distributed within the Spanish judiciary as follows:

  • TSJs would have competence on the exequatur of foreign awards, as well as the action to set aside the award and the appointment of arbitrators.
  • First instance courts would retain competence regarding judicial assistance in the taking of evidence, the adoption of interim measures and the enforcement of domestic awards issued in Spain.

One issue raised by this structure is that the Bill fails to clarify whether judicial decisions on the exequatur of foreign awards and the refusal to appoint an arbitrator can still be appealed, as CPA 1881 and AA currently allow. Until now, when First instance courts were empowered to adjudicate these issues, it was clear that Provincial courts could hear such appeals, as they have general jurisdiction on appeals against lower courts’ decisions. TSJs decisions, on the other hand, cannot generally be appealed. Thus, if the Bill was approved as it is now, we would have seemingly contradictory provisions, and we would be left to wonder whether TSJs decisions on arbitration matters can be appealed (quite unlikely) and in such case which judicial body will be empowered to hear the appeal.

Beyond that specific issue, the general objection I have to the scheme laid down in the Bill is that it lacks a logical rationale. If the Government intends to specialize TSJs in arbitration, why does it still reserve some of the competences for the lower courts? If the Bill purports to assign the “supervision” competences (action to set aside and enforcement of awards) to a higher court, while leaving the “assistance” competences to the lower courts, why does it empower the TSJs to decide on the appointment of arbitrators as well, which is by all accounts a judicial assistance competence? Additionally, as mentioned before, it makes little sense for First instance and Commercial courts to retain competence for the exequatur of foreign judgments.

Nevertheless my biggest concern with the Bill, again from a general perspective, is that it misses the opportunity to solve an eternal claim among practitioners: the need to create an appeal to unify criteria in arbitration issues. As we have seen it is most probable that TSJ’s decisions on appointment of arbitrators, action to set aside and exequatur of foreign awards will be final, since they cannot be appealed. As to the rest of the issues, some of the judgments by the lower courts can be appealed before the Provincial courts, but the Provincial courts’ decisions are final as well. Therefore, arbitration matters will be subject to a great variety of criteria, which is clearly incompatible with legal certainty. Unfortunately, none of the amendments to the Bill submitted by the political parties in Congress even mentions the possibility of introducing a unification appeal.

In my opinion, a reasonable structure for judicial competence on arbitration matters could be the following:

  • Lower courts (First instance and Commercial courts) would hear all matters related to judicial assistance, that is appointment of arbitrators, taking of evidence, adoption of interim measures, and the enforcement of domestic awards. Their decisions would be susceptible of appeal to the regional TSJ.
  • The TSJs would entertain the enforcement of foreign awards (exequatur) and the action to set aside an award, and their decisions would not be susceptible of (ordinary) appeal.
  • An extraordinary ‘unification appeal’ against TSJs decisions, both in first instance and as appeal court, should be created before the civil section of the Supreme Court. This device would only be available in situations of split between TSJs, and the Supreme Court would act as a Cour de cassation, that is it would not review the merits of the case but limit itself to establish doctrine on arbitration issues, following a sort of certiorari rationale, to use an American legal term.

V. Conclusion

The Bill submitted by the government to reform the Spanish Arbitration Act takes steps in the right direction for the promotion of national and international arbitration in Spain. It improves the regulation to set aside the award, arbitrators’ liability, arbitration of corporate disputes and the effect of insolvency proceedings on arbitration agreements.

However, the amendment concerning the challenge of judicial jurisdiction favors frivolous attempts to avoid abiding by arbitration agreements, and the elimination of dissenting opinions in the award is a mistake that prejudices parties, arbitrators and arbitration in general. Moreover, the measures concerning competence of judicial bodies on arbitration matters lack coherence and do not further uniform legal criteria on arbitration matters.

Spanish public authorities have emphasized on many occasions their desire to make Spain, and particularly Madrid, a first class international arbitration seat. This is the first time the Spanish legislature has attempted to bring a general amendment to the AA since its enactment in 2003. It will be long before Spain has an equally promising opportunity to establish a coherent regulation that ensures legal certainty, which can only be achieved with a unification appeal. Unfortunately, despite its great progress it seems that, once again, Spain is going to be late to its appointment with international arbitration.

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