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International Arbitration Report Madrid Update: Arbitration And The Spanish Bankruptcy Act by Calvin A. Hamilton and Laura Vinssac

HAMILTON Madrid, Spain

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


MEALEY’S International Arbitration Report

Vol. 25, #7 July 2010

Commentary Madrid Update: Arbitration And The Spanish Bankruptcy Act By Calvin Hamilton and Laura Vinssac

[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. Laura Vinssac is an intern with the firm and holds a Masters Degree in International Business Law and Management. Copyright 2010 by Calvin A. Hamilton and Laura Vinssac. Replies to this commentary are welcome.] This month’s comment examines the denial of an appeal by the Provincial High Court of Barcelona (the “Court”), No. 86/2009 dated April 29, 2009.1 In the case at bar, the Court sets forth an enlightening analysis on the effect of the Spanish Bankruptcy Act2 (“Bankruptcy Act”), especially article 52.1, on the validity of arbitration agreements. In this case, the petitioner brought an appeal to dismiss the order that admitted a motion to contest jurisdiction. The Court dismissed the appeal and declared itself without jurisdiction. Overview And Background

On December 18, 2001, PIRELLI & C.S.P.A. (“PIRELLI”) and LICENSING PROJECTS S.L. (“LP”) signed a trademark licensing agreement. The agreement included an arbitration clause which required that all disputes arising from the “validity, interpretation, performance and termination” of the contract were to be resolved by arbitration, pursuant to the ICC Arbitration Rules. Paris was designated as the seat of the arbitration and English was selected as the language of the arbitration proceedings.

The agreement provided that the contract and the rights and obligations of the parties were governed by Italian Law. There was no choice of law concerning the arbitration clause. On April 2007, PIRELLI unilaterally terminated the contract due to alleged breach of contract by LP. On November 2007, PIRELLI filed a request for arbitration before the ICC, in Paris. On July 11, 2007, prior filing the request for arbitration, LP was declared in voluntary bankruptcy by order of the Commercial Court No. 2 of Barcelona.3 Lower Court Decision

LP contested the jurisdiction of the Arbitration Tribunal and, whilst the arbitration proceedings were pending, on January 2008, filed a suit against PIRELLI before the Court of First Instance4 (“Lower Court”) based on acts of unfair competition, fundamental breach of contract and compensatory damages within the framework of the performance and termination of the licensing agreement. A motion to contest the Lower Court’s jurisdiction was then filed by PIRELLI on the basis that the dispute was subject to arbitration. During the arbitration and the Lower Court proceedings, LP challenged the jurisdiction of the Arbitral Tribunal on the following grounds: First, the subject matter submitted to the Lower Court prevented the Arbitration Tribunal from exercising jurisdiction over the dispute since, according 1


Vol. 25, #7 July 2010

to the Spanish Unfair Competition Act5 (“Competition Act”), matters relating to unfair competition issue are within the exclusive jurisdiction of the Spanish Courts, and thus not capable of settlement by arbitration. Second, the arbitration agreement is ineffective pursuant to article 52.1 of the Bankruptcy Act which provides that “during insolvency proceedings the arbitration agreements entered into by the debtor cease to have effect.” Furthermore, as a consequence of the declaration of insolvency the subject matter of the dispute is not freely disposed of at law, in the context of article 5 of the Spanish Arbitration Act6 (“Arbitration Act”). Thus, under the lex fori the dispute is not capable of settlement by arbitration. Finally, LP asserted that it litigated in interest of the creditors and referred to the impossibility to submit the dispute to the Arbitration Tribunal due to the high cost of these proceedings and given its lack of economic means. The Lower Court held that the subject matter of the dispute was subject to arbitration and it therefore lacked jurisdiction to hear the matter which resulted in a stay of further court proceedings. LP Appealed To A Higher Court

LP appealed the Lower Court’s decision before the Court alleging and reiterating the aforestated arguments. PIRELLI submitted an answer to the appeal together with a copy of the partial award rendered by the Arbitration Tribunal on September 19, 2008, in which it upheld its jurisdiction to decide the dispute. The Court dismissed the appeal, refusing to overturn the Lower Court decision and relegated the dispute to arbitration proceedings. The Provincial High Court ruled as follows: The Scope Of The Arbitration Clause Covers Extra Contractual Matters Arising From The Contractual Obligations Of The Parties

The first issue concerns whether or not the dispute could be subject to arbitration considering the Unfair Competition Law requirements. 2

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The Court notes that the presumed acts of unfair competition imputed to PIRELLI are linked to alleged breaches of contract or to acts that are not authorised under the contract. Consequently, the causa petendi has its basis in the contractual relationship and hence, is subject to arbitration by virtue of the arbitration clause contained in the licensing agreement. The Court continues by stating that the scope of the arbitration agreement covers all those “extra-contractual matters arising from the contractual relationship of the parties.”7 Furthermore, it asserts that a restrictive interpretation in this regard would entail an admission that one of the parties can derogate from the binding force of an arbitration agreement and escape from the obligations thereof by intermingling or deviating conducts and formally qualifying them as alien to the contractual relationship. The Court concludes that in light of the abovementioned, the Arbitration Tribunal does have the jurisdiction to hear the dispute. The Spanish Bankruptcy Act Applies To Domestic Arbitrations But Not To International Arbitrations

Concerning the effect of the bankruptcy proceedings on the arbitration agreement, the Court analyses the spirit of the Bankruptcy Act in this regard. Article 52.1 of the Bankruptcy Act provides that during insolvency proceedings the arbitration agreements entered into by the debtor “cease to have effect, without prejudice to what is said in the international treaties.” The Court’s finding here is twofold. First, the Court acknowledges that conventions signed by Spain, such as the New York Convention8 (“NYC”) and the European Convention,9 are integrated in Spain’s legal system and take precedence over national legislation in those cases envisaged in their scope of application. The Court continues by noting that in the case at bar, the arbitration in question is international in nature in the context of article 3 of the Arbitration Act and therefore, falls under the objective scope of article II.1 of the NYC and article 1.a) of the European Convention.


MEALEY’S International Arbitration Report

Vol. 25, #7 July 2010

In light of the above, the effect of LP’s bankruptcy on the arbitration agreement shall be assessed according to the said Conventions. Article VI.2 of the European Convention provides that the existence and validity of an arbitration agreement shall be assessed pursuant to, the (a) law to which the parties have subjected the arbitration agreement, failing any indication thereon, (b) the law of the country in which the award is to be rendered and failing that, (c) the law to which the parties subjected the substance of the dispute.

including a modification of article 52 of the Bankruptcy Act, was put forth by the Government.

Consequently, the law governing the arbitration clause is not Spanish Law but that of the seat of Arbitration, i.e., French Law. The Court asserts that in conformity with French Law the declaration of bankruptcy has no effect on the validity of the clause and hence, the arbitration agreement is valid.

If the draft amendment becomes law, it will put an end to the distinction between domestic and international arbitrations and establish a uniform solution that will support the validity of the arbitration agreements regardless of when the bankruptcy is declared. The draft amendment evidences the pro-arbitration stance of the Spanish legislator and the growing importance of commercial arbitration in Spain. If approved by Parliament, the new provision will lead to a strengthening of arbitration as a dispute resolution mechanism.

Second, the Court states that the restriction of article 52.1 of the Bankruptcy Act is applicable to domestic arbitrations but not to international arbitrations and that any such restriction will apply to international arbitration only to the extent that the parties’ agreement or the international conventions signed by Spain designate Spanish Law as the applicable law to determine the validity of the arbitration agreement. The Court asserts that the dispute does not surpass the scope of private relations, nor refers to matters that are beyond the free disposition of the parties, finally concluding that the dispute is capable of being settled by arbitration according to article 5 of the Arbitration Act.

The modification seeks to follow the European position on the matter while eliminating incoherence between the two paragraphs of the article. The new wording states that the bankruptcy declaration, by itself, will not affect the mediation or arbitration agreements that may have been concluded by the debtor.

Endnotes 1.

Audiencia Provincial de Barcelona (Sección 15ª), Auto núm. 86/2009 de 29 de abril de 2009. PIRELLI & CSPA v. LICENSING PROJECTS S.L.

2.

Ley 22/2003, de 9 de julio, Concursal.

3.

Juzgado Mercantil núm. 2 de Barcelona (autos 335/2007).

4.

Juzgado de Primera Instancia.

According to the Bankruptcy Act, specifically the second paragraph of article 52, if the declaration of bankruptcy takes place once the arbitration proceedings have commenced, then said proceedings can continue until a final award is rendered; whilst, if the bankruptcy declaration is prior to the commencement of the arbitration proceedings the arbitration agreement will have no effect or validity.

5.

Ley 3/1991, de 10 de enero, de Competencia Desleal.

6.

Ley 60/2003, de 23 de diciembre, de Arbitraje.

7.

Translation by the authors.

8.

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York 1958.

In this regard it is important to note that on February 19, 2010, a draft amendment to the Arbitration Act,

9.

European Convention on International Commercial Arbitration, Geneva 1961. n

The Reform Of The Bankruptcy Act And The Validity Of The Arbitration Agreement

The question that arises is what will be the effect of article 52 of the Bankruptcy Act on an arbitration agreement if said agreement is governed by Spanish law.

3


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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