REUTERS | Susana Vera

Annulment and public policy: has the position changed in Spain?

In a landmark ruling handed down on 15 June 2020, the Spanish Constitutional Court has held that Spanish courts cannot continue annulment proceedings where both parties to the annulment action wish to withdraw from the proceedings, even where there is a public policy element involved.

The initial dispute

The underlying arbitration concerned a housing dispute. An award was granted in which the tenants concerned were evicted from the property and required to pay rent. The tenants began proceedings with the High Court of Justice of Madrid to annul the award, on the basis that the clause submitting any disputes to arbitration was “abusive” to consumers. However, the parties subsequently reached an agreement regarding the financial obligations of the award, and the parties applied to the High Court of Justice of Madrid to terminate the annulment proceedings.

The annulment proceedings

The High Court of Justice of Madrid refused to terminate the proceedings. Citing its own previous judgments, it held that where there is a good reason to begin an annulment proceeding, the parties cannot withdraw from the action to annul the award, on the basis that there is a general interest in filing those awards that are contrary to public order. Instead, the court should verify whether the annulment action should go ahead because of the potential to injure certain general interests, such as the preservation of the public order. Consequently, it proceeded to annul the award.

The parties then applied to the Constitutional Court of Spain and filed a recurso de amparo (appeal), arguing that the decision to continue with the annulment proceedings violated their right to effective judicial protection under section 24 of the Spanish Constitution. The Constitutional Court agreed, finding that there had been a violation of the constitution. In particular, the Constitutional Court held:

  • The High Court of Justice was correct to find that parties cannot freely terminate an annulment proceeding where there is an element of public order present. However, here the underlying issue was private, and the reason for termination was because there was no further interest in pursuing litigation by the parties as they had reached an agreement regarding execution of the award.
  • Annulment proceedings should be viewed as a process of external control over the validity of an award. They should not include a review of the merits of the case.
  • The public order exception was included within Spanish law as a reason to refuse to recognise foreign arbitral awards. Constitutional jurisprudence defines the concept of public order as “the set of public, private, political, moral and economic legal principles that are mandatory for the preservation of society”. Thus only an arbitral award that contradicts some or all of these principles can be annulled under the public order exception.
  • While the public order exception is not entirely clear, meaning that there is a risk that it could be used by the court to re-examine the merits, the Constitutional Court reiterated that it should not be so used as this would undermine the institution of arbitration and the will of the parties. A mere discrepancy with the parties’ right to withdraw cannot permit the court to review the merits of a matter submitted to arbitration, even under the guise of the public order exception.

Effect of the Constitutional Court’s findings

The Constitutional Court’s decision is a positive step for arbitration in Spain. In the first place, it overturns numerous prior decisions of the High Court of Justice, which were used to support the decision to continue with the annulment proceedings. In effect, this hands control back to the parties, although the Constitutional Court did note that, in exceptional circumstances, the ability to overrule the parties and continue to annul the award is a power which the High Court of Justice will maintain.

Moreover, the Constitutional Court confirmed that annulment proceedings do not permit the court to re-examine the merits of an arbitral award. Instead, they can only be used as an external control over whether the arbitral process was valid, that is, as a guard against procedural impropriety, for example.

Perhaps most importantly for arbitration proceedings going forward, the Constitutional Court held that the public order exception was limited. This should mean that awards can only be annulled in exceptional circumstances, which would make arbitration with a Spanish seat more attractive to contracting parties.

Taken together, these findings are positive for the Spanish arbitration community, after a number of unhelpful decisions in recent years. However, it remains to be seen what effect this decision will have on arbitration in Spain in the longer term, and in particular, to what extent the High Court of Justice of Madrid will take the Constitutional Court’s comments on board.

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