Op-ed article by our partner Luis Bravo for Cinco Días
3 February, 2022
International Arbitration: key to protecting and expanding business globally
17 October, 2024
The recent ruling of the Constitutional Court of 15 February 2021 has declared that the review of arbitration awards by the High Courts of Justice must be interpreted restrictively, not allowing to review the merits of the case. Furthermore, the judgment holds that the arbitrator’s duty to state reasons is not comparable to that required of judicial bodies. This duty is considered to be fulfilled if the reasoning of the award allows to know the criteria on which the decision is based. Thus, the arbitrators’ duty to state reasons is more limited in scope than that required to courts.
The Civil and Criminal division of the Supreme Court of Justice of Madrid (the “TSJM“) had delivered a judgment on 8 January 2018, in a proceeding for the annulment of an arbitral award, declaring nullity of the award ex art. 41.1 f) of Law 60/2003, of 23 December 2003 on Arbitration (the “LA“).
The TSJM based the annulment of the award on the grounds of violation of public policy due to resulting from the infringement of the right to effective judicial protection ex art. 24.1 of the Spanish Constitution (the “CE“), due to the failure to state reasons for the award, as well as to a wrong assessment of the evidence.
An application for amparo before the Constitutional Court (the “Constitutional Court”) was submitted against the decision declaring the nullity of the arbitral award. The Constitutional Court decided to uphold the application for amparo, annulling the decisions delivered by the TSJM in its ruling of 15 February 2021 (application for amparo nº 3956-2018), whose reporting judge was María Luisa Balaguer Callejón (the “Ruling“).
1. Grounds for the amparo application
The application for amparo is based on the following grounds: (i) Art. 41 LA does not include among the reasons for the annulment of the award the control of the grounds of the arbitral award, therefore, the argumentation of the award is not a matter of public policy; (ii) court has imposed the canon of control of the duty to state reasons that is applicable to judicial decisions on the awards; and (iii) arbitration is not based on the principle of effective judicial protection (art. 24.1 EC).
2. Grounds for the Decision
The TC establishes in the Ruling that arbitration is an alternative dispute resolution mechanism that finds its constitutional basis in the principle of freedom of choice of the parties enshrined in art. 10 of the CE, which must be subject to minimal intervention by the courts:
“[I]n the recent STC 46/2020, of 15 June, FJ 4, to which we now refer, we have pointed out that arbitration -as it is configured by the Arbitration Law- is a dispute settlement mechanism, to which the minimum intervention of the jurisdictional bodies is consubstantial due to the due respect for the freedom of choice of the parties (art. 10 CE), […]”
In addition, in line with its recent ruling nº 46/2020, of 15 June, the TC confirms the criterion set out in the aforementioned judgement in and limits the scope of the action for the annulment of the arbitration award provided for in art. 41 of the LA. Indeed, the Ruling confirms the restrictive nature of the action for annulment, which must be limited, when judging a possible violation of public policy, to a review of the legality of the arbitration agreement and the arbitrability of the subject matter and the “procedural correctness of the arbitration proceedings”:
“We also recall that […] the action for annulment is the judicial control mechanism provided for in arbitration legislation in order to ensure that the arbitration proceedings comply with its rules, […] such control has a very limited content and does not allow for a review of the merits of the case decided by the arbitrator, nor should it be considered as a second instance […].
Now, once again, we must reiterate that the assessment by the competent judicial body of a possible contradiction of the award with public policy cannot lead to a new analysis of the matter submitted to arbitration, replacing the role of the arbitrator in the resolution of the dispute. Instead, it must be limited to a decision regarding the legality of the arbitration agreement, the arbitrability of the subject matter and the procedural correctness of the arbitration proceedings.
In this regard […] and, from the procedural point of view, public order is configured as the set of necessary formalities and principles of our procedural legal system, and only arbitration that contradicts any of these principles may be declared null and void for violation of public order. Therefore, the purpose of the action for annulment, can only be the analysis of possible procedural errors in the arbitration proceedings, in compliance with fundamental principles of due process, […]“
In this line, the TC warns about the dangers of excessive judicial intervention in the field of arbitration as a result of the extension of the concept of public order. Thus, the Ruling objected the criterion that had been held by some national courts:
“Also, in this recent STC 46/2020, we warned of the risks of over-extension of the concept of public policy as a ground for annulment of arbitral awards [art. 41 f) LA] and of the need to carry out a restrictive interpretation of the concept. Otherwise, there would be a risk of violating the freedom of choice of the parties (art. 10 EC) and their specific waiver of the jurisdiction of ordinary courts (art. 24 EC). It must therefore be firmly established that the ground provided for in Article 41(1)(f) of the LA cannot allow the courts hearing the action for the annulment to replace the criterion reached by the arbitrator […].
In other words, the possible court review of the award and its conformity with public policy cannot lead to a substitution of the arbitral tribunal by the court in applying the law. Nor is it a second instance to review the facts and law of the award, or a mechanism for controlling the correct application of case law”.
On the other hand, the Ruling addresses the duty to state reasons applicable to arbitration awards, decoupling it from art. 24 of the CE and basing it exclusively on the requirement set out in art. 37.4 of the LA. On this premise, the TC states that it is not required that the arbitration award contains an exhaustive assessment of all the arguments and facts presented by the parties. Instead, it is sufficient if the award allows to know the criteria on which it is based:
“Moreover, with regard to the argumentation of the awards, it should be clarified that an exhaustive and detailed argumentation of all aspects and perspectives that the parties may have is not even required, since the right to obtain a well-informed decision, favourable or adverse, is a guarantee against arbitrariness and unreasonableness and this, in arbitration, implies that the decision must contain the elements and grounds, which must not be arbitrary, that allow the legal criteria or the equitable basis on which the decision is based to be known […]
We say that the duty to state reasons does not have the same nature in both kinds of decisions, because in the case of judicial decisions it is a requirement inherent to the right to effective judicial protection ex art. 24 CE. However, for arbitration awards, this obligation appears in Art. 37.4 LA […] it is a requirement of exclusive legal determination, and it could therefore be dispensed at the behest of the legislator.
[…] Art. 37.4 LA only provides that “the award shall always state the reasons”, but it does not expressly impose that the arbitrator must decide on all the arguments presented by the parties or that he must indicate the evidence on which he has based his decision on the facts, or give reasons for his preference of one piece of evidence over another. The only legal specifications on the content of the award […] are negative, since they refer to the limitations imposed on the arbitral decision, derived from the provisions of Art. 41.1 LA on the grounds for annulment of the award, […]. That is to say, the legal provisions only state that the award must contain a statement of the grounds on which the decision is based, but not that the argumentation must be convincing or sufficient, or that it must necessarily extend to certain points. […] this duty to state reasons for awards is exclusively determined by the law, and does not stem from art. 24.1 CE, it would be illogical to understand that this brief legal provision contains a stricter rule than the one imposed on judicial bodies, […]“.
When setting out the basis on which the duty to state reasons by judicial decisions and awards should be reviewed, the TC clarifies that the expression “jurisdictional equivalent” referring to arbitration does not imply that it must comply with the requirements of the duty to state reasons of judicial decisions, but rather that the said term refers to the effects of res judicata which can be extended to awards:
“It may be that the confusion that this Court has been observing in some rulings, such as the one that is now subject matter of the application for amparo, has been caused by the use in our first rulings (SSTC 15/1989, 26 January; 62/1991, 22 March; 288/1993, 4 October; 17411995, 23 November; and 176/1996, 11 November) – and then reiterated in later ones – of the term “jurisdictional equivalent” to refer to arbitration. If that was the cause, it is necessary to clarify that such equivalence specifically refers to the effect of res judicata that is produced in both types of proceedings, judicial and arbitral”.
Furthermore, the TC criticises the criterion adopted by the TSJM, considering that the said court annulled the award exclusively due to a discrepancy of opinion between what was decided by the arbitrator and what the TSJM would have ruled, had the dispute been resolved by the latter. Therefore, the Ruling establishes that the court deciding the action for annulment is not allowed to decide on the merits of the case:
“As the applicants for amparo and the public prosecutor make clear, the judicial body, on analysing the award, concludes that the arguments offered by the arbitrator […] are insufficient because all the evidence was not assessed, most of all because the pre-existing legal proceedings between the parties were not taken into account. […] Similarly, the Civil and Criminal Division of the High Court of Justice of Madrid does not share the assessment of the evidence made by the arbitrator, […] Now, the fact that the same conclusions are not drawn from the evidence only implies the existence of a division of opinions among the arbitrator and the judicial body, but in no way can we speak of a breach of the duty to state reasons in the award or of an unreasonable decision by the person who was in charge of settling the dispute. […] In short, from the reading of the contested arbitral award it can be concluded that it contains sufficient and logical argumentation, without it being possible to appreciate any kind of breach, incoherence or contradiction.
[…] the decision of the judicial body to annul the award for insufficient argumentation (art. 37 LA), was contrary to the constitutional canon of reasonableness of judicial decisions (art. 24.1 CE), a conclusion that is further reinforced by the conduct of the TSJM, which reviewed the merits of the case exceeding the constitutional limits of the duty to state reasons and the principle of congruence. […]
As it can be seen, the argumentation of the contested decision only shows its discrepancy in the legal assessment made by the arbitrator and, therefore, once again, it should be recalled that the action for annulment can only refer to errors in procedendo, and cannot lead to a review of the application of substantive law by the arbitrators, that is, that arbitral decisions can only be annulled on the basis of the failure to comply with the requirements of the due process in the arbitral instance […]”.
Finally, and in this sense, the TC concludes by warning that the criterion applied by the TSJM represents a sort of transformation of the action for annulment, which should only be an exceptional remedy to be applied for specific and exceptional reasons: “[i]n view of this, it is manifestly unreasonable and clearly arbitrary to try to include in the notion of public policy ex art. 41 f) LA what simply consists of a mere review of the assessment of the evidence carried out by the arbitrator, because through this evidentiary review what is being done is a real transformation of the action for annulment, which is an extreme and exceptional remedy that cannot be based on purely formal infringements, but which should only serve to address situations of real and effective defencelessness or violations of fundamental rights or to safeguard Spanish public order […]” .
3. Implications of the Ruling
With the Ruling, the TC has guaranteed the legal certainty provided by arbitration as a method of dispute resolution in line with what it had already decided in its previous Ruling nº 46/2020, of 15 June.
Thus, the TC connects arbitration with the execution of the principle of freedom of choice by the parties stated on Art. 10 of the CE, consolidating constitutional endorsement. In addition, and in this sense, the TC reinforces its protection by (i) restricting the action of the jurisdictional courts in charge of deciding the action for annulment of the award, as well as (ii) clarifying the criteria of the duty to state reasons required for arbitration awards.
The Ruling constitutes a milestone of great importance for the consolidation of arbitration in Spain by definitively consolidating the legal certainty provided by Spain as a seat of international arbitration.
This endorsing decision of the TC constitutes the ultimate boost for international investors to opt for Spain as a benchmark seat for arbitration, in view of the legal certainty provided by the new established criteria of the TC, as well as considering the competitiveness and efficiency in the administration of international arbitrations provided by the recently created Madrid International Arbitration Centre (CIAM).
