Spain unveils draft Bill requiring higher threshold for awards to be found contrary to public policy | Practical Law

Spain unveils draft Bill requiring higher threshold for awards to be found contrary to public policy | Practical Law

Alejandro López Ortiz (Senior Associate) and Silvia Martínez (Junior Associate), Hogan Lovells International LLP

Spain unveils draft Bill requiring higher threshold for awards to be found contrary to public policy

Published on 06 May 2010 • International, Spain
Alejandro López Ortiz (Senior Associate) and Silvia Martínez (Junior Associate), Hogan Lovells International LLP
The Spanish government has recently published a draft Bill to amend the Spanish Arbitration Act which, amongst other things, requires a higher threshold for awards to be found contrary to public policy.
The Spanish government has recently published a draft Bill to amend the Spanish Arbitration Act (the Act). In February 2010, we reported on proposed amendments to the Act following a press release from the Ministry of Justice (see Legal update, Future amendments to the Spanish Arbitration Act). However, the publication of the draft bill itself has revealed more changes than those originally announced.
One of the changes proposed by the draft bill is the qualification of the public policy ground for setting aside an award, to require an award to manifestly contravene public policy in order to be set aside. This amendment appears to strengthen the current standard, making Spanish arbitral awards more challenge-proof. However, a closer look reveals that the draft amendment is merely intended to reflect the actual position, both in Spain and in most other arbitration-friendly jurisdictions.
Although the text of most national arbitration laws commonly provides for the simple contravention of public policy as a ground to set aside an award (which is to be expected in accordance with the standards set out in the UNCITRAL Model Law and the New York Convention), in practice, national courts tend to restrict the public policy ground even further. Recent case law from some of the leading arbitral seats, such as France, Switzerland and Singapore, shows that judges are already applying a qualified interpretation of the public policy ground, creating a higher threshold for an award to be found to be contrary to public policy. This is also the position that has been adopted by Spanish judges in recent case law:
  • On 21 January 2010, the Court of Appeal of Pontevedra stated that the public policy ground for setting aside is a restrictive concept, limited to the fundamental rights and principles contained in the relevant section of the Spanish Constitution. The Court concluded that an award will only be set aside if it is shown that the arbitrator acted in complete disregard of a fundamental right or principle, and not just because one of the parties considers that those rights or principles have not been properly interpreted or applied to the case.
  • On 11 January 2010, the Court of Appeal of Madrid also supported a restrictive interpretation of the different grounds for challenging an award, explicitly requiring a manifest breach of the arbitration agreement or the arbitral procedure agreed by the parties. In relation to public policy, although the Court did not expressly require a manifest contravention, it openly criticised the use of the public policy ground as an "open door" for the judges to replace the arbitrators' criteria.
Other noteworthy proposed amendments in the draft bill that were not previously announced include:
  • The modification of procedures for challenging the jurisdiction of the courts on the basis of the existence of an arbitration agreement. The new procedures proposed in the draft bill allow for such challenges to be filed at any point until the Answer is filed and also introduce a hearing to decide on this objection.
  • Arbitrators are to be deprived of the power to act ex aequo et bono, even if the parties have so agreed, except in international arbitrations. The draft justifies this on the basis that the principle of ex aequo et bono will be fulfilled by the new mediation proceedings (for further information, see Legal update, Future amendments to the Spanish Arbitration Act).
  • A new clarification procedure is introduced for awards where arbitrators partially exceed their functions.
  • Arbitral institutions are obliged to monitor that the conditions provided by Spanish law to be an arbitrator are met (full legal capacity, absence of professional restrictions and so on) and to guarantee the arbitrator's transparency and independence.
Some of these amendments have not been well received by the Spanish arbitration community. In particular the removal of the right for arbitrators to act ex aequo et bono and the obligation for arbitral institutions to guarantee the independence of the arbitrators, have been criticised.
There does not seem to be any reason to abolish the power of arbitrators to act ex aequo et bono, where the parties have agreed to it. In addition, it seems clear that this principle in arbitration and mediation proceedings play very different roles.
The obligation imposed on the arbitral institutions to guarantee the independence of the arbitrators appears to constitute an excessive burden on institutions. Although it is reasonable for institutions to monitor an arbitrator's independence, it would be very difficult to guarantee it, particularly in the case of arbitrators appointed directly by the parties. The introduction of this obligation is seen by many as contrary to Spain's positioning as an attractive seat for international arbitration and it is expected that this provision will be modified before the draft bill is discussed in parliament.