Draft changes to Arbitration Act: positive changes and potential setbacks - International Law Office

Introduction
Changes in jurisdiction
Public policy grounds for setting aside an award
Public administration disputes
Potential setbacks

Introduction

The Ministry of Justice has recently made available a draft law, dated February 19 2010, to amend the 2003 Arbitration Act. The act represents a landmark in the promotion of domestic arbitration in Spain and the establishment of Spain as a respected venue for international arbitration. The framework established by the act, the approach of the Spanish courts and the enthusiasm of arbitration practitioners have succeeded in moving Spain away from outdated practices and in shaping an arbitration-friendly regime that is, in many ways, at the vanguard of international arbitration. However, the proposal recognizes that improvements can still be made. It introduces a number of amendments and a proposal for a groundbreaking arbitration procedure to resolve disputes within the public administration. Only a few issues have failed to attract the general approval of Spain's arbitration practitioners.

Changes in jurisdiction

The draft law proposes the reallocation of jurisdiction for the support of arbitral proceedings from the courts of first instance to the high courts of the autonomous regions. Under the act, jurisdiction over the appointment of arbitrators rests with the courts of first instance, but the draft law would transfer jurisdiction to the high court of the autonomous region in which the arbitration is taking place. Moreover, under the draft law jurisdiction over actions to set aside arbitral awards would rest with the high court of the autonomous region, not the corresponding court of appeals as at present.

In seeking to unify the criteria of the various judicial levels, the amendment aims to provide a degree of legal certainty that is lacking in the existing division of jurisdiction between the courts of the autonomous regions (ie, the high courts) and those of the provinces (ie, the courts of appeal). Jurisdiction over actions to set aside arbitral awards and to appoint arbitrators is distributed between 52 courts of appeal and hundreds of courts of first instance.

Furthermore, the draft law would assign all applications for recognition and enforcement of foreign awards to the high courts, regardless of the subject matter of the award; the courts' decisions would not be subject to appeal.

The draft law introduces an amendment that confers jurisdiction to resolve such matters on a reduced number of courts - that is, the 17 high courts of the autonomous regions. Arbitration practitioners have welcomed the proposal, which would ensure more consistent criteria and reasoning in court rulings and a greater degree of legal certainty.

Public policy grounds for setting aside an award

The act provides that an arbitral award may be set aside if it conflicts with public policy. The draft law raises the threshold for finding an award to be contrary to public policy by requiring that such an award be "manifestly in conflict with public policy".

This is a clear case of the law adapting to and incorporating the prevailing criteria of the courts. As such, it represents a legislative step in the right direction, as the raising of the public policy threshold reinforces Spain's position as an arbitration-friendly jurisdiction.

The trend within arbitration-friendly jurisdictions is to limit the standard of the public policy exception. Although different legal systems - most notably, the courts of different states - appear not to have a uniform approach to the public policy defence, a narrow reading of the public policy argument is increasingly widespread.

Public administration disputes

The draft law introduces a revolutionary amendment: a new arbitration procedure for disputes within the public administration. This procedure will be used to resolve disputes between the state administration and any public body, social security managing entity or other public entity, or between two or more such entities. Such disputes will be resolved through a dedicated executive committee.

The draft law establishes two basic limitations on access to the procedure, which may not be used for disputes (i) where the sum at issue is below €300,000, or (ii) that relate to criminal law, conflicts of competence or the control functions performed by the state administration, or fall within the jurisdiction of the Court of Auditors.

Provided that these requirements are met, intra-administrative disputes must be submitted to the new process. The draft law provides that the resolutions of the executive commission will not be subject to appeal, making the new procedure both compulsory and final.

The legislature's aim in regulating this procedure reflects a need to resolve disputes between public entities using an objective procedure that ensures both prompt decisions and a rigorous application of the law. A positive response from public bodies will be essential to the success of this promising innovation, and it is hoped that they will participate in and apply the procedure willingly.

Potential setbacks

Although most of the draft law's proposals have been welcomed, two measures in particular are potentially detrimental.

Arbitral impartiality
The draft law would require arbitral institutions to guarantee the transparency and independence of their arbitrators. This is a surprising amendment, particularly as it is difficult to understand the underlying legislative intention. It is unclear how arbitral institutions can guarantee an arbitrator's independence. Moreover, requiring such a guarantee appears to place an excessive burden on arbitral institutions in cases where they are in charge of appointing the arbitrators; where the arbitrators are appointed directly by the parties, the requirement seems wholly unrealistic.

Notwithstanding the existence of criteria and guidelines that can assist courts or arbitral institutions in deciding whether grounds for a finding of impartiality exist, the fact remains that impartiality is a state of mind that is almost impossible to measure objectively. Consequently, it is always necessary to analyze the issue on a case-by-case basis and, more specifically, to examine the circumstances surrounding the alleged impartiality. The appropriate authority is generally the arbitrator and occasionally - where necessary - the court, but never an arbitral institution. Most arbitrators would be happy to see this amendment dropped from the final version of the amending law.

Amicable composition
The draft law proposes a far-reaching restriction on amicable composition, whereby an arbitrator would be able to determine an issue ex aequo et bono (ie, on the basis of what is right and fair) only in international arbitrations and only when the parties had expressly agreed to this approach.

This amendment seeks to reinforce the status of arbitration as a quasi-judicial dispute resolution method, and restrictions on the ex aequo et bono approach are part of an attempt to ensure legal certainty in awards. The rationale is that awards must be based strictly on the letter of the law in order to ensure a greater number of predictable decisions that will be reliable and will encourage public confidence in arbitration.

The draft law further seeks to justify the amendment on the basis that the role of equity arbitrations will be fulfilled by the new law on mediation. However, the principle of ex aequo et bono plays different roles in arbitration and mediation. The two dispute resolution methods operate on different bases, serve different purposes and achieve different results according to the parties' expectations when agreeing to one or both processes.

Therefore, there is no reason to abolish arbitrations ex aequo et bono. Arbitration should be governed by the consent of the parties and if the parties have agreed to equity arbitration, this principle should be applied.

For further information on this topic please contact Félix J Montero at PEREZ-LLORCA by telephone (+34 91 436 04 20), fax (+34 91 436 04 30) or email (fmontero@perezllorca.com).