REUTERS | Marcelo del Pozo

The reign in Spain: Courts clarify scope of arbitration

Arbitrary, illogical, absurd and irrational are powerful words, especially so when handed down by the Spanish Constitutional Court in a recent landmark ruling assessing the standard for the review of arbitral awards on public policy grounds.

The court was ruling on a case centered on a EUR600 million inheritance spate between family members over the estate of Marquis de Paul, a member of Málaga’s prominent Larios Family. The major area of contention was differing family members’ opposition to the dissolution and the distribution of the assets of Mazacruz, the company holding de Paul’s properties.

Family fortunes

A sole arbitrator ruling on equity found that Gutierrez-Maturana-Larios Altuna, a son of a previous marriage of Marquis de Paul, had abused his dominant position in opposing the dissolution. The arbitrator ordered that the company be liquidated, and the proceeds distributed in accordance with each partner’s shareholding, regardless of voting rights. Altuna challenged the arbitral award before the Madrid High Court, which annulled the award for violation of public policy, finding that the arbitrator’s reasoning and assessment of evidence had been insufficient despite agreeing that the arbitrator was entitled to order the dissolution.

On 15 February 2021, the Constitutional Court ruled that the Madrid’s High Court’s decision violated the constitutional right to effective judicial protection by reopening the merits of the dispute: “the possible judicial control of the award and its acceptance of public policy cannot lead to the consequence that the judicial body replaces the arbitral tribunal in its duty to apply the law”.

This ruling has been heralded as a breakthrough in (re)establishing the high standards for setting aside arbitral awards on public policy grounds. Put simply, courts reviewing set-aside or annulment applications of arbitral awards on public policy grounds are not permitted to review the merits of the case and replace the arbitral tribunal’s application of the law. Rather, the courts’ main role is simply to ensure that compliance with due process and substantive public policy—which is narrowly construed. In this context, the arbitrators’ duty to issue a reasoned award is only breached when the award is “arbitrary, illogical, absurd or irrational”.

Narrow margin

The reaffirmation of the “arbitrary, illogical, absurd or irrational” test is important for international arbitration in Spain as the Madrid High Court had, in recent times, deviated from the extremely narrow standard of review of arbitral awards on public policy grounds and the strict construction of the right to a reasoned award that Spanish courts had historically applied.

Spain’s arbitration regime establishes six narrow grounds for annulment, with public policy being the most common. However, in the past few years, several awards were successfully challenged on public policy grounds, leading some observers to question the impact of these decisions on the attractiveness of Spain as a place of arbitration.

This Constitutional Court decision should put to rest the fuzz that once existed about the Madrid High Court’s incursion into the merits of international arbitration awards.

Spain has experienced a successful growth of its arbitration business and its capital – Madrid – now appears in the top ten of the most frequently selected venues for ICC arbitration. Its favourable legal framework for arbitration has contributed to its consolidation as an arbitration-friendly jurisdiction. Arbitration in Spain is governed by the Spanish Arbitration Act of 2003, largely modelled after the United Nations’ Commission on International Trade Law’s Model Law, which reflects a worldwide consensus on key aspects of international arbitration practice.

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