In this post we examine a recent judgment of the Spanish Constitutional Court, which is of great importance in reducing the scope for the merits of Spanish arbitration awards to be reviewed on the basis of public policy.
Under the Spanish Arbitration Act (the “Act”), certain grounds to set aside arbitral awards can be found by its own motion by the court dealing with the challenge of the award, or at the behest of public prosecutors where they are involved in proceedings. This happens, specifically, with awards that deprive one of the parties of their right to a defence (art. 41.1.b of the Act), contain determinations on matters that cannot be submitted to arbitration (art. 41.1) or violate public policy (art. 41.1.f.).
This situation has led the Madrid High Court of Justice (Tribunal Superior de Justicia, “TSJ”) to hold on a number of occasions that the validity or invalidity of an award is not for parties to decide so, once an award has been challenged at the relevant court, it would not be possible to withdraw or waive that action or for the parties to reach agreement and settle.
The Constitutional Court's decision and its significance
The Constitutional Court rejected this principle in its recent judgment of 15 June 2020, in which it upheld an appeal by the parties to a challenge against an arbitral award. The parties had tried to end the proceedings because they had reached an agreement out of court.
However, the importance of this judgment does not lie in the result of this specific case, as the view taken by the TSJ that it overturned was that of a very small minority, and not even shared by all the judges at that court.
Rather, the real importance of the Constitutional Court judgment is in the fact that it is a first step toward drawing the boundaries of the concept of public policy, which the Madrid TSJ had used as a basis to examine the substance and the reasoning of certain arbitral awards.
Although “public policy” (orden público) is an expression used in many laws all across Spain’s legal system, in none of these is it specifically defined. This is precisely why it is the ground for setting aside awards that is most often cited in challenges, and also the ground that has required more interpretation by Spanish courts. As reaffirmed in a great number of rulings, public policy constitutes the set of principles, general governing rules and fundamental rights enshrined in the Spanish Constitution that underpin the political, social and economic fabric of the country. It therefore involves the fundamental legal standards of our legal system which, as such, are overriding and cannot be derogated by parties’ wishes.
In recent years, the Madrid TSJ has, however, developed a very broad interpretation of the public policy concept, and used it as cover to set aside arbitral awards on the basis of reviewing arbitrators’ reasoning and assessment of evidence i.e. a re-examination of the merits of a case. This expansive interpretation of the concept of public policy has been highly criticised in the arbitration world and led many legal operators to abandon Madrid as a seat of arbitration.
In its findings, the Constitutional Court tears into this interpretation and anticipates future constitutional appeals, where it warns that “precisely because the concept of public policy is not very clear-cut, this multiplies the risk that it merely becomes a pretext for courts to re-examine issues discussed in the arbitration procedure, depriving the arbitral institution of its purpose and ultimately violating parties’ independence in decision-making”. This means that “the court cannot, with the excuse of an alleged violation of public policy, review the substance of a matter submitted to arbitration” and that “the challenge of an award as a process must be understood as an external check on the validity of the award that does not allow a review of the merits of arbitrators’ decisions”.