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International Arbitration Report Madrid Update: The Scope Of Judicial Scrutiny Of Awards Involving Third Parties

by Calvin A. Hamilton and Luis Capiel

HAMILTON Madrid, Spain

A commentary article reprinted from the April 2010 issue of Mealey’s International Arbitration Report

MEALEY’S International Arbitration Report

Vol. 25, #4 April 2010

Commentary Madrid Update: The Scope Of Judicial Scrutiny Of Awards Involving Third Parties By Calvin A. Hamilton and Luis Capiel

[Editor’s Note: Calvin A. Hamilton is an international arbitrator, 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 2010 by Calvin A. Hamilton and Luis Capiel. Replies to this commentary are welcome.]

corporation Vinzeo Technologies S.A.U. (henceforth “Vinzeo Tech.”), another company was transferred from Vinzeo Tech. to Mr. Emiliano, as part of the purchase price for contract 1. Both contracts contained identical arbitration clauses. Subsequently the abovementioned real estate properties were transferred from Teabla to Inversiones by virtue of two contracts, neither of which contained an arbitration clause.

The involvement of third parties — alien to an arbitration agreement — in disputes resolved through arbitration can sometimes be a source of confusion, which is exemplified by the two decisions subject to this month’s focus. Both decisions were rendered in annulment procedures before different Sections of the Madrid Provincial High Court.

Emiliano et al, filed a request for arbitration against Vinzeo Tech., based on contract 2 (the details of this claim are unknown). Vinzeo Tech., as well as Vinzeo Digital and Teabla, filed an answer to the request for arbitration. In addition, Vinzeo Digital and Teabla filed a “new request for arbitration” against Emiliano et al, to be decided jointly with the original arbitration claim. Vinzeo Digital and Teabla asserted several claims, only two of which are of interest for the purposes of this comment:

Decision Of The Madrid Provincial High Court (Section 14) No. 339/2009, Of 6/30/20091

Mr. Emiliano, Mr Rubén, et al (henceforth “Emiliano et al”), sold the company Teabla Comunicaciones S.A.U. (henceforth “Teabla”) to the corporation Vinzeo Digital Products S.L.U. (henceforth “Vinzeo Digital.”). The acquisition contract (henceforth “contract 1”) also mentioned that certain real estate properties were to be transferred from Teabla to “the sellers” pursuant to another section of the contract which stipulated the transfer of said properties to the corporation Inversiones Inmobiliarias Aucel S.L. (henceforth “Inversiones”). By virtue of another contract (henceforth “contract 2”) signed on the same day by Mr. Emiliano and the

Reimbursement of expenses born by Teabla for the use of vehicles by Teabla’s former managers, Messrs. Emiliano and Rubén, incurred subsequent to the transfer of the Company.

Reimbursement of expenses for electricity and maintenance fees born by Teabla for the transferred real estate properties after they were transferred.

In respect of both items Teabla had issued invoices against Inversiones. 1

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The arbitrator awarded Vinzeo Digital and Teabla both reimbursement claims against Emiliano et al, who challenged the award in set aside proceedings before the Madrid High Court on the following grounds: •

The award was contrary to public policy — article 41 (1) (f ) of the Spanish Arbitration Act of 2003 (henceforth “the Act”) — for the claims were actually directed against Inversiones, whose due process rights were violated since it was not a party to the arbitration.

The reimbursement for the use of vehicles was outside the scope of the arbitration agreement — article 41 (1) (c) of the Act.

An arbitration agreement did not exist in respect of the claim for reimbursement for the real estate property expenses — article 41 (1) (a) of the Act.

The Court accepted the public policy argument and set aside the award insofar as the two aforementioned claims were concerned, without addressing the two other subsidiarily alleged grounds for annulment. Vinzeo Digital and Teabla had argued that Emiliano et al could not assert the violation of due process rights allegedly suffered by a third party. They also argued that, since Vinzeo Digital and Teabla, and not Inversiones, had been condemned by the award, no rights of due process were violated by failing to involve Inversiones as a party in the arbitral proceedings. The Court dismissed these arguments with the following reasoning:2 “[. . .] if a claim asserted in an arbitration [. . .] affects a third party [. . .] as the liable party with respect to an obligation [. . .] in controversy, it will necessarily be the case that the person being litigated against, alien to that obligation [. . .], will lack legitimatio ad causam [. . .]. And there can be no doubt that Emiliano et al are entitled to allege their own lack of legitimatio ad causam.” 2

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But the Court went further and stated that “in any case, the lack of legitimatio ad causam, alleged by the petitioners, would have to be considered ex officio for being a question of public policy” and went on to quote a decision by the Spanish Supreme Court — which bore no relation to arbitration — in support of the ex officio consideration of the exception of lack of legitimatio ad causam. The Court explained that by issuing invoices against Inversiones, Teabla had bindingly identified Inversiones as its debtor, and was thus estopped from asserting otherwise. Therefore, the Court concluded, Emiliano et al lacked legitimatio ad causam and thus the award violated public policy within the meaning of the ground for annulment provided for in article 41 (1) (f ) of the Act. The Court’s reasoning amounts to a review of the merits of the case and thus breaches one of the most basic principles of Spanish arbitration law. The question whether a defendant has legitimatio ad causam is not different from the question whether said defendant — to the exclusion of anybody else — is liable. With no further explanation the Court affirmed that the lack of legitimatio ad causam supposedly is a question of public policy. The authors respectfully, but decidedly disagree. While it is generally true that parties are entitled to allege their own lack of legitimatio ad causam, i.e. contend that not they but somebody else is the debtor, there can be no doubt that, provided an arbitral tribunal has decided on issues validly submitted to arbitration, the parties are not entitled to raise the lack of legitimatio ad causam in set aside proceedings. This is so because this question is undoubtedly an essential part of the merits and bears no relation whatsoever to public policy. This of course does not mean that, Courts are always prohibited in set aside proceedings from reviewing the arbitrators’ determinations on the involvement of third parties. Courts can, in fact, also err on the side of restraint, as we shall see in the following example. Decision Of The Madrid Provincial High Court (Section 9) No. 632/2004, Of 11/17/20043

The corporations Energía y Secado S.A. (henceforth “Energía”) and Nuovo Pignone S.P.A. entered into a contract which included an arbitration clause. The

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contract was signed by Mr. Rafael, Energía’s manager and almost exclusive shareholder. In an ensuing arbitration Nuovo Pignone S.P.A. was granted relief against both Energía and Mr. Rafael. The arbitrator applied the theory of the piercing of the corporate veil, finding that the Energía — which lacked assets — was a mere instrument in the hands of Mr. Rafael. The Madrid High Court was seized of an action to set aside the award on the grounds, among others, that firstly, the interpretation by the arbitrator, according to which Mr. Rafael was a party to the contract, resulted in the award being contrary to public policy, and that secondly, the arbitrator had decided issues outside the scope of the arbitration agreement, both being grounds for annulment under the — then applicable — Arbitration Act of 1988 (analogous to articles 41 (1) (f ) and (c) of the 2003 Act). With regard to the first ground the Court explained that for an award to be contrary to public policy it must violate fundamental constitutional rights and liberties and that upon application of this criterion the arbitrator’s interpretation was not contrary to public policy. With regard to the second ground the Court made reference to the Kompetenz-Kompetenz principle and explained: “From the extent and content of the arbitration clause it becomes apparent that the arbitration agreement stretched to any controversy that might arise from the contract between the parties, and therefore one has to appreciate that when the arbitrators, based on the arbitration agreement, have ascertained that the contract was entered into by Mr. Rafael as an individual and not merely as manager or representative of Energía y Secado S.A. they are not exceeding their authority given that they have undertaken to decide one of the controversies raised by the parties on the basis of the arbitration agreement, since one of the controversies raised [. . .] was the role played by Mr. Rafael in the contract, so that the

Vol. 25, #4 April 2010

arbitrators, pursuant to what had been agreed by the parties and within the issues brought forward by them in the arbitral proceedings and within their own competence, resolved said claims [. . .], so that the question whether Mr. Rafael was or was not party to the [contract] is a question closely linked to the contract and thus to be resolved in the course of arbitration proceedings.” This conclusion is rather surprising and brings to mind images of Munchhausen.4 While some jurisdictions, such as France, may — to a lesser or greater degree — recognize the arbitrators’ priority in the determination of their jurisdiction, in any case said priority is merely of a “chronological” nature in the sense that at the end of the arbitral process the courts recover their power of full scrutiny regarding the arbitrators’ jurisdiction. If a party challenges the arbitrators’ jurisdiction in annulment proceedings the court must necessarily ascertain whether by virtue of the arbitration agreement the arbitrators had jurisdiction, not only ratione materiae but also ratione personae. Even if the question of whether someone was a party to an arbitration agreement coincides with the question of whether he was a party to the contract — as will regularly be the case in this sort of constellation — the court has to make its own determinations regarding the former and is in no way bound by the arbitrators’ findings. The contrary would amount to denying petitioner its day in court without having determined whether in fact said petitioner has voluntarily submitted to arbitration. Commentary

The first decision serves as an example of an overly interventionist attitude of state courts, which disregards the negative effect of the arbitration agreement and thus undermines the effectiveness of arbitration itself. Such an attitude is contrary to the spirit and content of the Spanish Arbitration Act and stands in contrast to the pro-arbitration position generally adopted by Spanish Courts. One can assume, however, that the Court was unaware that it was adopting an attitude contrary to the effectiveness of the institution of arbitration. At the other end of the spectrum, in the second decision, the court was cognizant of the negative effect of arbitration agreements and of the need for judicial 3

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Vol. 25, #4 April 2010

restraint. However it went too far in refusing to even determine the scope ratione personae of the arbitration agreement. While these examples are by no means representative of the standards of Provincial High Court decisions, they underline the desirability of further concentrating the competences regarding arbitration matters with more specialized courts with a deeper understanding of arbitration related issues. This is precisely the intention of one of the key innovations in a bill recently introduced by the Spanish Government regarding amendments to the law of arbitration. Should this bill be approved by parliament the competences for annulment proceedings as well as for the judicial appointment of arbitrators and for the exequatur of foreign arbitral awards, which so far are divided among the Courts of First Instance5 and the Provincial High Courts,6 would be assigned to the Higher Courts of Justice.7 This would indeed be a considerable improvement.


Endnotes 1.

SAP Madrid (Sección 14) núm 339/2009, de 30/6/2009.


Translations by the authors.


SAP Madrid (Sección 9) núm 17/11/2004, de 17/11/2004.


It also reminds of the former case law by the German Bundesgerichtshof regarding the KompetenzKompetenz-Klausel.


Juzgados de Primera Instancia.


Audiencias Provinciales.


Salas de lo Civil y de lo Penal de los Tribunal Superiores de Justicia. n

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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MEALEY’S ™ A commentary article reprinted from the April 2010 issue of Mealey’s International Arbitration Report by Calvin A. Hamilton and L...

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