In 2007, a constructor and a developer entered into a construction contract, which contained the following arbitration agreement:

On 29 October 2008, the developer requested the Madrid Bar Association to nominate an arbitrator. On 3 November 2008, the Commercial Court of Madrid declared the constructor's insolvency. The appointed arbitrator contacted both parties to inform them of her acceptance on 26 February 2009. The constructor refused to take part in the arbitration proceedings alleging that the arbitration agreement relied on by the developer to initiate the arbitration proceedings had lost its validity and effect as a consequence of the opening of the insolvency proceedings. However, the arbitrator decided to continue the arbitration proceedings, regardless of the declaration of insolvency, and rendered an award.

The constructor challenged the award on the ground of lack of validity of the arbitration agreement as a consequence of the declaration of insolvency. According to Article 52 of the Spanish Insolvency Act 22/2003, of 9 July (IA), a declaration of insolvency has the effect of depriving the force and effect of any arbitration agreement to which the insolvent is a party, unless the arbitration proceedings are under way at the time of the declaration of insolvency. The key issue to be decided by the Court of Appeal was therefore, when the arbitration proceedings were deemed to be under way.

The developer alleged that the arbitration commenced on 29 October 2008, when the Madrid Bar Association received the request to appoint an arbitrator. By contrast, the constructor argued that the arbitration proceedings could not be considered initiated before the date on which it was first informed of the nomination and acceptance of the arbitrator, that is, on 26 February 2009

In deciding the challenge to the award, the Court of Appeal of Madrid relied on Article 27 of the Spanish Arbitration Act 60/2003, of 23 December (AA), which provides that in the absence of agreement between the parties, arbitration proceedings will be deemed to be commenced on the date on which a request to refer a dispute to arbitration is received by the respondent. Following this provision, the Court analysed the sequence of events and concluded that there were no previous communications between the parties in order to reach an agreement on the appointment of the arbitrator. Therefore, the first time that the constructor heard of the request for the dispute to be referred to arbitration was when the arbitrator nominated by the Madrid Bar Association informed the parties of her acceptance on 26 February 2009. This communication was received by the constructor after its insolvency had been declared and thus the arbitration agreement invoked had already lost its force and effect. The Court of Appeal of Madrid therefore set aside the award because of lack of a valid arbitration agreement.

The Court of Appeal of Madrid's decision has finally provided important clarification on the criterion to decide whether or not an arbitration is under way, and, therefore, whether or not the arbitration agreement has been deprived of effect by a declaration of insolvency under Article 52 IA. Such criterion can be found in Article 27 AA: unless the parties have agreed otherwise, arbitration proceedings are not deemed to be under way until the respondent first receives a request to refer a dispute to arbitration, irrespective of the claimant's prior steps to appoint an arbitrator or to set the arbitration in motion.

However, this judgment will likely lose most of its relevance within the forthcoming months, since one of the amendments included in the bill for the modification of the AA, currently before the Spanish Parliament (see Legal update, Spain unveils draft Bill requiring higher threshold for awards to be found contrary to public policy), is intended to abolish the rule contained in Article 52 IA.