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Spanish court rules on the law applicable to the validity of an arbitration agreement
Practical Law UK Legal Update 2-519-7019 (Approx. 3 pages)
Spanish court rules on the law applicable to the validity of an arbitration agreement
by Practical Law
| Published on 31 May 2012 • Spain |
Alejandro López Ortiz (Counsel) and Silvia Martínez Sastre (Associate), Hogan Lovells International LLP (Spain)
In a recently published judgment, the Superior Court of Justice of Madrid (SCJ) ruled on the applicable law of the validity of an arbitration agreement and rejected opportunistic allegations of violation of public policy on the basis of the principle of good faith.
The judgment of the SCJ, the new court competent over arbitration issues (see Legal update, First decisions of the Superior Courts of Justice after the amendment of the Spanish Arbitration Act), upheld an award on jurisdiction issued under in an ICC arbitration.
The award declared the competence of the arbitral tribunal to decide the merits of the claims brought by a German company against a Venezuelan state-owned company arising out of a contract to repair submarines. The arbitration had been brought on the basis of the following arbitration agreement:
"This contract is regulated under Venezuelan laws. Any disagreement, doubt or dispute which arise out of, or related to the performance of this contract will be solved in accordance to the arbitration rules of the International Chamber of Commerce by three arbitrators appointed in conformity with these rules".
Absent agreement by the parties on the seat of arbitration, the ICC chose Madrid.
The Venezuelan state-owned company requested the award be set aside before the SCJ on four grounds:
- Lack of a valid arbitration agreement.
- Violation of public policy.
- Issues of arbitrability.
- Breach of due process.
Lack of valid arbitration agreement and violation of public order
According to the plaintiff, the arbitral tribunal had wrongly disregarded its arguments on the applicability of Venezuelan law to the validity of the arbitration agreement. If the tribunal had applied Venezuelan law, it would have concluded that the arbitration agreement violated Venezuelan mandatory provisions since it lacked the necessary consent by Venezuelan competent authorities.
The SCJ rejected the plaintiff's arguments for two reasons:
- The SCJ clearly differentiated between the law applicable to the contract and the law applicable to the arbitration agreement. The SCJ ruled that, under Spanish law, an arbitration agreement would be valid as long as it is valid either under the law chosen by the parties to govern the arbitration agreement, the law governing the subject matter of the dispute or Spanish law (Article 9.6 SAA, which follows Article 178(2) of the Swiss Federal Statute of Private International Law). The SCJ held that the arbitration agreement was valid, since it was valid under Spanish law, regardless of the result when considered under Venezuelan law. This would also be the conclusion if Article 2.2 of the SAA was to be applied further; this article prevents a state-owned company from invoking the prerogatives of its own law in order to avoid obligations arising from the arbitration agreement.
- Contrary to the plaintiff's position, an international standard of public policy is to be considered instead of a domestic standard. Following that approach, principles such as good faith or estoppel must be taken into account when deciding the case. The SCJ rejected the plaintiff's argument concerning insufficient consent to arbitration and pointed out that the plaintiff had never questioned the validity of the arbitration agreement before the dispute arose and indeed had never requested the consent to arbitration to be confirmed by any Venezuelan authority. According to the principle of good faith, the plaintiff was prevented from successfully alleging such a violation of public policy.
Arbitrability
The SCJ also rejected the plaintiff's argument that the tribunal lacked competence to decide issues of Venezuelan national security. According to the plaintiff, its claims affected national security since they referred to the repair of military submarines, and therefore could not be decided by any authority other than the Venezuelan courts. The SCJ again referred to the principle of good faith, noting that the contract had been in force for many years without the plaintiff objecting to its performance on national security grounds. The SCJ concluded that the plaintiff was not entitled to raise such objections now in these proceedings to set aside the award.
Breach of due process
The SCJ rejected the plaintiff's argument that the ICC had erred in dismissing its challenge to the president of the tribunal and that this was a breach of due process. The SCJ considered that there was no evidence as to how the rejection of the challenge had breached the procedure agreed by the parties.
The judgment of the SCJ is to be applauded because of its marked pro-arbitration approach when examining the validity of the arbitration agreement and because of its reference to an intrinsically international definition of the standard for public policy. The judgment is also worth mentioning because of the SCJ's approach to the relevance of the parties' attitude before the dispute had arisen, even in respect to public policy arguments.
This judgment confirms Madrid as a very attractive seat for international arbitration. Not only does the SAA provide some of the most advanced pro-arbitration rules, but its courts are also willing to apply them convincingly and consistently.