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International Arbitration Report Madrid Update: Untimely Allegation Of Arbitrator’s Lack Of Impartiality And Independence

by Calvin A. Hamilton and Luis Capiel

HAMILTON Madrid, Spain

A commentary article reprinted from the July 2008 issue of Mealey’s International Arbitration Report


MEALEY’S International Arbitration Report

Vol. 23, #7 July 2008

Commentary Madrid Update: Untimely Allegation Of Arbitrator’s Lack Of Impartiality And Independence By Calvin A. Hamilton and Luis Capiel

[Editor’s Note: Calvin A. Hamilton is founding partner with the firm HAMILTON, Madrid, and heads the arbitration department. He is admitted to the New York and the Madrid Bar. Luis Capiel is an associate with the firm and is admitted to the Madrid and the Munich Bar. Copyright 2008 by Calvin A. Hamilton and Luis Capiel. Replies to this commentary are welcome.] This month’s article examines Decision No. 66/2007, handed down by the Tenerife Provincial Court (Section 4)1 on February 14, 2007 in a procedure for annulment of an arbitral award. The Plaintiff (and Claimant in the arbitral proceedings), the corporation “Mirador del Duque, SL” (henceforth “Mirador”) requested the annulment of an arbitral award dated January 30, 2006, pursuant to article 41.1 of the Spanish Arbitration Act of 2003 (henceforth “the Act”), on the grounds that the award was issued in violation of the legal framework foreseen for the designation of arbitrators, and on the grounds that the award ran counter to public policy. Specifically, Mirador cited article 17.1 of the Act with regard to one of the three arbitrators who intervened in the arbitral proceedings, since there existed a professional relationship between his law firm and the Defendant (and Respondent in the arbitral proceedings), the corporation “Inversiones Hoteleras Playa del Duque, SA” (henceforth “IHPD”), who appointed him as an arbitrator.

Mirador alleged the following facts: •

Mirador and IHPD, companies with activities in the tourism sector, signed a contract whereby the latter was to exploit and manage the Hotel owned by the former. Said contract contained an arbitration clause.

A dispute arose with respect to the obligation by IHPD to pay certain amounts to Mirador. In May 2004, Mirador requested that the matter be resolved by arbitration, notified IHPD of the designation of its arbitrator and called upon IHPD to designate an arbitrator.

IHPD designated an arbitrator (henceforth “IHPD’s arbitrator”) and the third arbitrator was designated by lot.

On February 1, 2006, one day after the notification of the award, Mirador, by chance, got notice of the professional relationship in existence between IHPD’s arbitrator and IHPD. Specifically that the law firm which the former directed, had been counseling the Zamorano family, majority shareholders of the corporation IHPD, in negotiations for the sale of their shares in another company, which transaction was concluded end of

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MEALEY’S International Arbitration Report

Vol. 23, #7 July 2008

2005 or beginning of 2006. In addition, IHPD’s counsel in the arbitral proceedings, Mr. Zamorano, was a member of the Zamorano family. •

Mirador informed the President of the Arbitral Tribunal of these facts without receiving a response. Later, on February 9, 2006, Mirador requested the correction, clarification and issue of a supplement to the award, while ratifying the challenge with respect to IHPD’s arbitrator. The requests were dismissed by the Arbitral Tribunal, based on the opinion that, pursuant to article 38.1 of the Act, with the rendering of the award, the Tribunal had ceased in its functions.

It is Mirador’s position that the aforestated facts substantiate the application of articles 17 and 41 of the Act. The grounds for the challenge to IHPD’s arbitrator and eventual setting aside of the award are based on the said arbitrator’s obligation to “reveal any circumstance which could give rise to justified doubts about his impartiality and independence.”2 Sections 1 and 2 of article 17 of the Act read as follows:3 1.

Any arbitrator shall be and remain independent and impartial during the arbitration. Under no circumstances shall he maintain any personal, professional or commercial relations with the parties.

2.

The person designated as arbitrator shall disclose any circumstance which could give rise to justifiable doubts as to his impartiality or independence. The arbitrator, from the moment he is appointed, shall disclose to the parties without delay the occurrence of any such circumstance.

At any moment during the arbitration any of the parties may request the arbitrators to clarify their relationships with any of the parties.

The Court understood that Mirador was invoking “supervening circumstances,” i.e. circumstances posterior to the designation and acceptance as arbitrator, and viewed this as crucial because it could signify 2

that the challenge by Mirador was timely and subject to section 2 of Article 18 of the Act. Article 18 of the Act reads as follows: 1.

The parties may freely agree a procedure for the challenge of arbitrators.

2.

In the absence of an agreement, the Party who intends to challenge an arbitrator has to state the grounds within 15 days after becoming aware of the acceptance or of any circumstances which may give rise to justifiable doubts as to his impartiality or independence. Unless the challenged arbitrator resigns his position or the other party agrees to the challenge, the arbitrators shall decide on the challenge.

3.

If the challenge raised in accordance with the procedure agreed by the parties or established in the previous section is not successful, the challenging party may rely upon the challenge in applying to set aside the award.

The Court noted that Mirador claimed to have timely challenged IHPD’s arbitrator, after learning that circumstances occurred during the course of the arbitral proceedings, which generated doubts, which circumstances IHPD’s arbitrator had not revealed, in breach of the obligations pursuant to article 17.2 of the Act. The Court further explained that these allegations by Mirador were also of special significance to the question of whether there can be a challenge to an arbitrator after an award is rendered. Spanish Supreme Court doctrine holds that circumstances such as those before us can lead to fraudulent conduct, contrary to good faith, in the sense that a Party who is aware of a possible ground for a challenge, can reserve the challenge for after the decision at hand, in order to then invoke it in the event that the decision is unfavorable. The Court explained that this conduct would also infringe upon the coherence of one’s own acts,4 upon its declaration of incompatibility between the setting aside petition with that of prior knowledge of facts which give rise to challenge. The Court finally indicated that this doctrine is reflected in article 6 of the Act which establishes that


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“where a party, knowing of the non-compliance with any provision of this Act or any requirement of the arbitration agreement, does not state his objection within the period provided or, in the absence of such period, as soon as possible, shall be deemed to have waived the powers of legal challenge provided for in this Act.” The Court went on to state that therefore it is essential to ascertain whether in the present case Mirador had knowledge of the professional relationship existing between the law firm of IHPD’s arbitrator and IHPD, and whether Mirador, all the same, consented to the appointment. After examining the evidence, the Court found that both corporations, Mirador and IHPD, held — directly or indirectly — considerable amounts of shares of each other, and that there existed interlocking directors (at least until April 2006). It also found that the same lawyer who represented the interests of the Zamorano family in the above mentioned negotiations in 2005 had previously, during the years 2001 and 2003, acted as counsel and legal representative of IHPD. In this capacity, said lawyer had participated in meetings in which the interlocking directors and management were present. From these factual findings the Court inferred that these persons in management positions had knowledge of occurrences at both Mirador and IHPD, specifically about the latter enjoying a professional relationship with the law firm directed by IHPD’ arbitrator, and that therefore Mirador had constructive knowledge of the same facts. The Court explained that the knowledge does not refer merely to a supervening professional relationship, but, as IHPD alleges, to one which dates back to 2001. The Court therefore rejected the setting aside claim, since Mirador was deemed to have accepted the ar-

Vol. 23, #7 July 2008

bitrator’s appointment, and thus having waived the powers of legal challenge provided for in article 6 of the Act. Mirador did not prevail with its reasoning that the relationship between IHPD and its arbitrator’s law firm consisted of several isolated and limited engagements. Nor does Mirador prevail on the argument that it was unaware of the last engagement until after the rendering of the award. Instead, the Court appreciated a continuous professional relationship, known to Mirador all along. Parties to an arbitration under the Spanish Arbitration Act should therefore keep in mind that, if they are aware of past relationships of any kind between an arbitrator and the opposing party, but fail to address the matter at the beginning of the arbitral proceedings, they may be precluded from challenging the award on the grounds stipulated in article 18 of the Act. The Court expressly explained that in such cases a party cannot rely on the arbitrator’s standard declaration of impartiality and independence when he is appointed, but that the party has to inquire specifically, in view of the known circumstances.

Endnotes 1.

Audiencia Provincial de Santa Cruz de Tenerife (Sección 4ª); henceforth “the Court.”

2.

Article 17 of the Act.

3.

Translations by the authors.

4.

Non concedit venire contra factum proprium. n

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Š Copyright 2001 Mealey Publications. All rights reserved. Reproduction strictly prohibited without written permission.


Arbitration and the Fisc: NAFTA’s ‘Tax Veto’ by William W. (Rusty) Park Professor of Law at Boston University Vice President, London Court of International Arbitration Arbitrator, Claims Resolution Tribunal for Dormant Accounts in Switzerland

A case of note reprinted from the May 2001 issue of Mealey's International Arbitration Report.

© Copyright 2001 Mealey Publications. All rights reserved. Reproduction strictly prohibited without written permission.


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