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Madrid Court considers public order ground to set aside awards

19 May 2015
In a decision dated 28 January 2015 but only recently published, the Superior Court of Justice of Madrid (Madrid Court) set aside an arbitral award. The award dismissed a claim to declare two swap contracts null and void.  The judgment steps away from the traditional concept of public order found in Spanish jurisprudence and extends the concept of public order by finding that it includes errors in the application of the law.

The Madrid Court has also issued at least three more judgments overturning awards in which tribunals had dismissed claims to declare financial product contracts null and void. Although these judgments are not yet published, it has been revealed that one includes a dissenting opinion of the President of the Court disputing that an erroneous application of the law, even if mandatory, could amount to a breach of  public order. This dissenting opinion is said to defend a return to the traditional case law that sought to avoid set aside actions being turned into appellate actions. These decisions are likely to lead to an increase in attempts to set aside awards.

The Spanish Arbitration Act no. 60/2003 (AA 2003) does not define the exact meaning of public order. Up until now, the Spanish Courts have traditionally applied a restrictive interpretation to this concept, always requiring the existence of a violation of a fundamental right under the Spanish Constitution. Additionally, since 1999, the competition and antitrust principles proclaimed in Article 81 of the Treaty of the European Union are also considered to fall within the meaning of the concept of public order and, accordingly, their breach might justify the setting aside of an award (see Case C-126/1997 ECJ).

Spanish courts have faced many attempts to set aside awards on the grounds of article 41.1.(f). However, these applications have been consistently dismissed as attempts to correct mistakes in iudicando, that is, a mistake in the way the decision is taken by the judge or arbitrator (see judgment of the Court of Appeal of Madrid on 2 July 2001 and judgments of the Madrid Superior Court of Justice on 14 January 2013 and 11 November 2014) or mistakes relating to the arbitrator's interpretation and application of the law.

In the case commented, a hostelry company (the claimant) commenced an arbitration against a bank (the respondent), requesting the annulment of two swap contracts, signed between the parties in January 2008. The claimant argued an absence of consent. The claim was made during a time when banking litigation was on the increase, with many claims being made, seeking to annul financial contracts (swaps, bonds, multicurrency mortgage and so on) on the basis of lack of consent or error.

The arbitral tribunal rendered an award on 14 January 2014 dismissing the claims. Consequently, the claimant sought to set the award aside pleading that it was contrary to public order. In the claimant's opinion, the bank had failed to comply with its obligations of diligence, loyalty and information under the Spanish Stock Exchange Market Act and other applicable laws. The claimant argued that these provisions were mandatory and fell within the concept of so-called public economic order.

The Madrid Court granted the request to set aside the award.  According to the court, the award contravened "basic rules and principles of contracting that are especially serious or in need of special protection" and therefore was susceptible to being set aside. Moreover, the court stated that the general principle of good faith must be included among these rules and principles.

The Madrid Court analysed the award in light of the jurisprudence set forth in the judgment of the Supreme Court of 20 January of 2014, no. 354/2014 regarding information duties of the banks for the commercialisation of financial products, the Supreme Court concluded that when financial products are offered, it must be understood that the banks are giving an advisory service.

The arbitrator had concluded that the offer by the bank did not equate to an advisory service and, thus the same duties of information could not apply. The Madrid Court then found that the award was based on an infringement of mandatory rules, since it had failed to apply the mandatory jurisprudence regarding duties of information in the commercialisation of swaps.

The bank had failed to determine if the swap was suitable for the claimant, nor provided information on costs and risk.

According to the Madrid Court, such an error in the application of mandatory rules resulted in a contravention of the public order. Therefore, the court set aside the award for its arbitrariness and lack of motivation (which implies an infringement of the right to defence and the principle of prohibition of arbitrariness proclaimed in the Spanish Constitution respectively).

This judgment steps away from the concept of public order as found in Spanish jurisprudence up until now. Two particular aspects of the court’s decision are worthy of mention:

• The inclusion of every mandatory rule and principles of contracting in the concept of public order, even if they are not fundamental rights or competition and antitrust principles.

• The setting aside of an award on the basis of arbitrariness and lack of motivation when an error of application of the law is found.

The Madrid Court  has failed to address previous judicial decisions that specify that not every mandatory rule of the legal system can be deemed to fall within the concept of public order, but only those mandatory rules with constitutional transcendence (for example, the judgment of the Valencia Superior Court of Justice of 26 April 2012).

This decision is not only crucial to banking disputes where similar issues might arise, but to all arbitration proceedings from now onwards. The  Madrid Court’s judgment raises many questions, such as whether other rules and principles could be derived from the concept of public order, or whether the threshold would be a different one in those cases not considered to be of special seriousness or in need protection.

It remains to be seen if the decision will be followed by other courts and whether the apparent dissent among the members of the Madrid Court will be resolved. In any case, it is likely to lead to an increase in attempts to set aside awards under this ground.

*A version of this article was originally published by Practical Law Arbitration http://uk.practicallaw.com/country/arbitration

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