The International Arbitration Review: Spain
This chapter provides an overview of the arbitration developments in Spain since May 2020. It focuses on both commercial arbitration under the Spanish Arbitration Act (SAA)2 and investment treaty arbitration.
Section I briefly addresses some of the main features of the SAA and the key differences between the SAA and the UNCITRAL Model Law. Section II provides an overview of the year's salient developments in Spain, including an analysis of relevant Spanish judicial decisions in the past year, an update on investor–state arbitration and a summary of three judgments from the Spanish Constitutional Court that have had an extraordinary impact on the arbitration in Spain. We conclude with some brief conclusions, indicating the outlook for the year to come.
i Background to the legal framework: the SAA
SAA: a monist, Model Law jurisdiction
The SAA, essentially based on the UNCITRAL Model Law of 1985 (Model Law)3 with certain significant modifications, was amended in 2011 to provide greater legal certainty and to relieve the overloaded national courts,4 and contains the following key features:
- it generally adopts a monist approach in providing a uniform regulation of domestic and international arbitration, although some provisions of the SAA apply to international arbitration only;5
- its governing philosophy aims to be anti-formalistic;6
- its default rule is that arbitrators will decide pursuant to legal rules (as opposed to ex aqueo et bono), absent express agreement between the parties to the contrary;7
- it provides that the parties are free to decide the number of arbitrators, as long as the number is uneven. If the parties have not agreed on the number of arbitrators, the default rule is that the tribunal shall consist of a sole arbitrator;8 and
- arbitration is permitted regarding any matter that parties are free, pursuant to Spanish law, to settle between them.9
The SAA diverges from the Model Law in certain aspects.
As previously mentioned, the SAA establishes that any dispute may be submitted to arbitration if it can be freely settled by the parties pursuant to Spanish law (Article 2.1 of the SAA). Moreover, the SAA also provides that, in respect of international arbitration, an arbitration agreement is valid when it is deemed as such pursuant to any one of the following: the law chosen by the parties to govern the arbitration agreement, the law governing the merits of the dispute or Spanish law (Article 9.6 of the SAA).10
A state or a state-owned company may not invoke the prerogatives of its own laws to avoid its obligations under an arbitration agreement (Article 2.2 of the SAA).
In addition to the criteria under Articles 1(2) and 1(3) of the UNCITRAL Model Law, the SAA provides that arbitration will be deemed international if, among other things, it affects the interests of international trade (Article 3(c) of the SAA).11
Number of arbitrators
As noted above, the SAA's default rule when an arbitration agreement fails to stipulate the number of arbitrators is to have a sole arbitrator (Article 12 of the SAA).
The SAA limits the grounds for arbitrators' liability to wilful misconduct, bad faith or gross negligence (Article 21 of the SAA).
The SAA expressly states that arbitration is confidential unless otherwise agreed by the parties (Article 24.2 of the SAA).
ii Concept of international arbitration
As previously noted, arbitration will be deemed to be international in any of the following circumstances:12
- at the time the arbitration agreement was concluded, the parties' domiciles were in different states;
- any of the following are located outside the state where the parties (or one of them) are domiciled:
- the place of arbitration, as set forth in the arbitration agreement or pursuant thereto;
- the place of performance of a substantial portion of the obligations of the legal relationship giving rise to the dispute; or
- the place most closely related to the subject matter of the dispute; or
- the legal relationship from which the dispute arises affects the interests of international trade.
iii Form and content of arbitration agreements
According to the SAA, an arbitration agreement must be made in writing in a document signed by the parties, in an exchange of correspondence or by any other means of communication that provides a record of the agreement. This requirement is satisfied when the arbitration agreement appears and is accessible for subsequent consultation in any other format.13
The SAA, naturally, recognises the principle of separability of the arbitration agreement and its corollary, the principle of Kompetenz-Kompetenz.14
The SAA recognises that a valid arbitration agreement may exist and may encompass contractual as well as extra-contractual disputes, as long as the agreement reflects the will of the parties to submit all or some disputes to arbitration that have arisen or that may arise between them in respect of a particular legal relationship.15
Pursuant to the SAA, if the arbitration agreement is included in a standard form agreement, its validity and its interpretation shall be governed by the rules applicable to such contracts.16
Spanish courts, in interpreting arbitration agreements, tend to give international disputes a wider berth than domestic ones. Indeed, in matters of the arbitrability of a dispute and the validity of an arbitration agreement, the SAA allows them to do so by offering several options for saving (validating) an arbitration agreement whose validity or application might be questionable under the lens of purely domestic law.
As noted above, the SAA establishes, with respect to international arbitration, an in favorem validatis principle inspired by Swiss private international law.17 An arbitration agreement will be valid and a dispute capable of being submitted to arbitration if the requirements of any one of the following are met: the legal rules chosen by the parties to govern the arbitration agreement, the rules applicable to the merits of the dispute or Spanish law.18
The year in review
i Arbitration developments in local courts
The main development in local courts over the past months is the landmark ruling of the Spanish Constitutional Court of 15 February 2021. In this ruling, the Spanish Constitutional Court has reinforced arbitration in Spain by confirming, among other things, that the standard for the review of arbitral awards on public policy grounds should be extremely narrow. This ruling is explained in more detail in Section II.iii.
There have also been other interesting developments in local courts, as referred below.
Meaning of the reference to an 'arbitration tribunal' in the arbitration clause
The Tribunal Superior de Justicia de Madrid (the Madrid High Court of Justice or TSJM) ruled, in a decision dated 23 October 2020, that the mere reference to an 'arbitration tribunal' contained in an arbitration clause that does not establish the number of arbitrators is not a determining factor, nor does it necessarily imply that the will of the parties was to submit the dispute to a panel of three arbitrators, but it is also compatible with the arbitration being resolved by a single arbitrator.
The plaintiff brought a claim for the judicial appointment of a single arbitrator. In its response to the claim, the respondent opposed to the claim on the grounds that, considering the very terms in which the arbitration clause was drafted, the reference to the constitution of 'an arbitration tribunal' was to be understood as the submission by the parties to a collegiate body of three arbitrators.
The TSJM began its analysis of the dispute by stating that the SAA does not use the term 'arbitral tribunal' when referring to the appointment of arbitrators. In fact, the preamble of the SAA provides that Title III of the Act is devoted to the regulation of the figure of the arbitrator or arbitrators and that the legislator prefers the expressions 'arbitrator or arbitrators' to 'arbitral tribunal', which may cause confusion with judicial tribunals. In addition, in most of the rules of the SAA, the reference to arbitrators includes both the case in which there is an arbitration panel and the case in which the arbitrator is a sole arbitrator. Consequently, the SAA, when referring to the intervention of several arbitrators, uses the expression 'panel of arbitrators'.
The court then moves to examine the ordinary meaning of the word tribunal, reaching the conclusion that it does not have an exclusive meaning as collegiate body. Regarding the argument of the plaintiff that interpreting the clause as establishing a panel of arbitrators was in line with the entity and complexity of the contract, the project and the very relevant investment made by the plaintiff, the TSJM considered that this is not conclusive to understand that the will of the parties was to constitute a collegiate tribunal of three arbitrators. The court specifically mentions that although the complexity argument raised by one party might show that it was the will or intention of that party to submit any disputes to a collegiate body, this does not imply anything regarding the intention or will of the other party.
Consequently, the court concludes that given that the arbitration clause did not establish any procedure whether the arbitration body would be unipersonal or collegiate, Article 12 of the SAA would apply, according to which a single arbitrator will be appointed if there is no agreement between the parties on the number of arbitrators.
Statute of limitations regarding the action for annulment of the arbitral award
A decision rendered by the TSJM, dated 24 March 2020, dismissed a claim for annulment of the award because the statute of limitation period for filing the action had expired. The decision is significant for the detailed analysis of the nature of the statute of limitations.
The court recalled that Article 41.4 of the SAA establishes that the action for annulment of the award must be brought within two months as from the notification of the award or, in the event that correction, clarification or supplementation of the award has been requested, as from the notification of the decision on this request, or as from the expiry of the time limit for adopting such decision.
In the examined case, the challenged award had been notified on 7 June 2019, and the claim had been filed on 3 September 2019. The claimant argued that the time limit for the exercise of the action for annulment of the award was three months. To this, the court responded that whereas it is obvious that this period is two months according to the rule, the court understood that the claimant was seeking to extend it to three months on the basis that the month of August should not be counted, as the days of August are not business days for the purposes of procedural proceedings.
The court addresses the issue by pointing out that the term for the exercise of the action has a substantive and not a procedural nature. It explains that the action must inescapably be exercised within the time predetermined by law. In short, the expiry of the term implies the extinction of the right, which is of limited duration and extinguished by the mere passing of the term without the need for any other requirement. In addition, the court explained that the aforementioned nature of said term is clearly supported by the drafting of the current SAA, which, unlike the previous one, which regulated the 'recourse' of annulment, refers to the exercise of the 'action' of annulment. Thus, the court explains that we are in the presence of a substantive, not procedural, expiry term, the calculation of which must be made in accordance with civil law, not procedural law. According to the court, this can also be inferred from Section II of the Explanatory Memorandum of the SAA where, in relation to its Article 5, it exempts from the application of the procedural rules on the calculation of time limits, the cases of time limits established for the initiation of proceedings, such as the case of the exercise of the action for annulment of the award.
Legal standing of the arbitrator and the notary public
The TSJM analysed, in a decision dated 2 March 2021, the legal standing of the parties regarding the action for annulment of the award rendered by an arbitrator on the basis of an arbitration clause contained in a deed of will.
The defendant raised various grounds of opposition, including the lack of the necessary passive litis consortium, as the arbitrator and the notary public before whom the will was granted were not sued.
The court concluded on this point that even with a maximally protective conception of the term 'party' used by Article 41.1 of the SAA, in the present state of our legal system it is not possible to confer passive standing in the exercise of an action for annulment against the award, much less in a regime of necessary passive litis consortium, on the arbitrator who has made the award or on the institution that has administered the arbitration, nor on the notary public before whom the deed of will, which included the arbitration clause, was granted.
ii Investor–state disputes
Spain continues to see a number of international arbitral proceedings lodged against it owing to reforms to its electricity sector that have had a negative impact on renewable energy investors. Below is an overview of those claims and a summary of the first rulings issued in these matters.
Overview of investor claims against Spain
To develop its renewable energy sector, and starting in the late 1990s, Spain put in place an economic regime (a special regime) for qualifying renewable energy projects based on a feed-in tariff (FIT) scheme, must notably under Royal Decree 661/2007, in May 2007 (RD 661/2007).
From 2010 onwards, the government has enacted a series of legislative and regulatory measures that have changed the terms of the incentive regime. This culminated in an overall reform of the electricity sector introduced by a royal decree law in July 2013, which announced the withdrawal of the special regime as of that time in anticipation of a reformed regime, finally implemented in June 2014 when a new Electricity Law and accompanying regulation were passed and published.19 As noted in previous editions, these changes prompted numerous claims by foreign investors in international arbitral proceedings under the Energy Charter Treaty (ECT) (as well as hundreds of claims by national investors in the Spanish domestic courts).20
Spain has faced or is facing at least 48 ECT claims as a result of these measures.21 Of these cases, two claims have been brought under United Nations Commission on International Trade Law Arbitration Rules, 10 under the Rules of Arbitration of the Stockholm Chamber of Commerce and the rest before the International Centre for Settlement of Investment Disputes (ICSID), pursuant to the ICSID Convention and the ICSID Arbitration Rules. Some of these cases include claims brought by multiple investors in one proceeding.
Investors claim, inter alia, that the changes made to the FIT scheme are contrary to earlier commitments made by the Spanish government in breach of investors' legitimate expectations and are in violation of the fair and equitable treatment (FET) standard under Article 10(1) of the ECT.
Rulings to date in the claims against Spain
To date, 21 final awards have been published determining ECT claims brought against Spain. In 2016 and 2017, Spain prevailed in the first two cases, Charanne and Isolux. Those cases have since been considered to be outliers arising from their unique facts.22 Between 2017 and 2019, final awards in favour of the investors were issued in Eiser, Novenergía, Antin, Masdar, Greentech, 9Ren, NextEra, Cube, SolEs, InfraRed, Operafund, Stadtwerke and RREEF. A detailed analysis of these cases may be found in previous editions. In 2020 and the beginning of 2021, final awards were issued in PV Investors, Watkins, Hydro Energy, RWE, BayWa and FREIF. With the exception of Stadtwerke and FREIF, the investors prevailed in every one of these awards, which are addressed in more detail below.
The PV Investors tribunal issued an award on 28 February 202023 finding Spain liable for breaching the Fair and Equitable Treatment standard of the ECT. The PV Investors comprise 26 separate claimant entities that belong to 14 separate investor groups. The PV Investors invested in 72 different photovoltaic (PV) plants. The investors' claims with regard to their investments were joined together in a single arbitration proceeding governed by UNCITRAL rules and administered by the Permanent Court of Arbitration. All of the claimants' PV installations were duly registered in the Spanish Registry for the Special Regime Facilities (RAIPRE) by 29 September 2008, thus entitling them to the RD 661/2007 FIT.
Regarding the jurisdiction of the tribunal, in its preliminary award on jurisdiction dated 13 October 2014, the arbitral tribunal already rejected the jurisdictional objections submitted by Spain and found that it had jurisdiction over the dispute between the 26 claimant entities and Spain.
In relation to the merits, the claimants had submitted two claims. In the primary claim, the claimants argued that they had a legitimate expectation to receive the RD 661/2007 FIT for the lifetime of their PV installations, breached by Spain's disputed measures. In the alternative claim, they posited that even if the tribunal found that their only legitimate expectation was to a 'reasonable return', Spain still breached the ECT by implementing the disputed measures. The tribunal rejected the primary claim.
With regard to the alternative claim, the tribunal found that Law 54/1997 guaranteed renewable energy (RE) investors a 'reasonable return'. According to the tribunal, to ascertain whether Spain had breached the ECT, it had to first assess the impact of the disputed measures on the claimants returns ('in this particular case the quantification of the harm, if any, informs the finding on liability'24). If the disputed measure had prevented the claimants from earning a 'reasonable return' then they would be entitled to compensation under the ECT. The tribunal ordered the parties' experts to submit a joint model, quantifying the harm suffered by the claimants. For the purposes of this calculation, the tribunal determined that the 'reasonable return' under Law 54/1997 was 7 per cent post-tax.
The tribunal then assessed which claimants had seen their returns reduced to below 7 per cent post-tax by the disputed measures, finding that only 'the Claimant entities whose internal rate of return (IRR) with the Disputed Measures are lower than 7 per cent are entitled to compensation and the harm calculated by the experts in the EJM represents the measure of compensation for each Claimant entity'25. This entailed that nine claimant entities were not entitled to damages, reducing the aggregate damages to €91.1 million.
The Watkins tribunal issued an award on 21 January 202026 in regard to the investment carried out by Watkins (Ned) BV, Watkins Spain, SL, Watkins Holdings Sàrl, Parque Eólico La Boga, SL, Northsea Spain, SL, Parque Eólico Marmellar, SL, Redpier, SL in eight wind farms for €91 million. The acquisition of the wind farms was completed in May 2012 and the wind farms were duly registered in the RAIPRE when they were acquired, and thus qualified to sell their electricity output under the RD 661/2007 economic regime.
Spain raised two jurisdictional objections in this case: (1) an Intra-EU Objection alleging that the tribunal lacked jurisdiction since intra-EU investments are the exclusive competence of the judicial institutions of the EU as noted in the Achmea judgment; and (2) a Taxation Carve-Out Objection noting that the 7 per cent levy established by Law 15/2012 was outside the tribunal's jurisdiction as a result of taxation carve-out in Article 21 of the ECT. The tribunal rejected the Intra-EU Objection, finding that its jurisdiction was 'based on the ICSID Convention, the ECT, and general international law principles governing State consent' which places it in 'a public international law context and not in a national or regional context'27. The tribunal also clearly established that the Achmea judgment did not apply to the ECT. The tribunal upheld the Taxation Carve-Out objection, rejecting that the measure had been implemented in bad faith by the state to avoid performing its obligations under the ECT.
Regarding the merits of the case, the main claim was that the changes to the regulatory framework carried out in 2010–2014 breached its legitimate expectations concerning the continued application of the RD 661/2007 FIT, thus breaching the Fair and Equitable Treatment Standard of the ECT.
The tribunal stated that 'specific commitments were in fact made to the claimants, namely by the relevant legislation and the representations' and, therefore, the tribunal ascertained that the claimants held legitimate expectations as to the continued application of the RD 661/2007 FIT.
The tribunal heavily criticised the decision on liability rendered in RREEF, in particular the fact that the RREEF tribunal's view that 'reasonable return' was dynamic was inconsistent with the fact that the cost of money on the capital markets was the same when RD 661/2007 was approved and in 2013 when RDL 9/2013 was passed. Moreover, the tribunal found that the determination of the rate of 'reasonable return' under the new regulations was 'not based on any identifiable criteria'.28
Additionally, the tribunal, when assessing whether the disputed measures where in breach of those expectations, relied on the Eiser award, which establishes that investors are entitled to expect that the regulatory regime under which they invested would not be radically altered. Thus, the tribunal found that Spain had violated the obligation under Article 10(1) of the ECT to accord the claimants Fair and Equitable Treatment and awarded the claimants damages of €77 million.
The Hydro Energy case referred to an investment in 33 hydro installations under the RD 661/2007. On 9 March 2020, the tribunal issued a decision of liability in which it found that Spain had violated the obligation under Article 10(1) of the ECT to accord the claimants Fair and Equitable Treatment.29 Accordingly, the tribunal ordered the parties to calculate the resulting damages corresponding to certain guidelines, issuing its award on quantum on 5 August 2020.30
Overall, the tribunal found that the matters relied on by the claimants were facts that an investor would have taken into account in a risk assessment process, but they did not engender a legally enforceable expectation that there would be no change. In particular, the special characteristics of small-hydro were plainly capable of being weighed in the balance in taking business decisions and business risks, but those characteristics did not make them immune from change or subject to special considerations for Fair and Equitable Treatment purposes.
The tribunal therefore concluded that the claimants did not receive any specific commitments or assurances in the legislation or otherwise that there would be no changes in the RD 661/2007 regime, and that, on the contrary, the claimants must have known that change was legally and politically possible, even though they took the commercial view that there was a low regulatory risk, especially for small-hydro.31
The tribunal stated that it was necessary to determine: (1) what the reasonable rate of return was when the claimants invested; (2) how the IRR of the individual plants should be calculated; and (3) whether each of the claimants' plants are achieving a rate of return above or below that which has been calculated to be reasonable.32
Thus, rather than simply accepting that the post-tax equivalent of 7.398 per cent pre-tax is a reasonable rate of return, the tribunal found it necessary to calculate, on an appropriate basis, what constitutes a reasonable rate of return in the small-hydro market in Spain.33
Unlike the tribunal in RREEF, the tribunal declared itself unable to state categorically what constitutes a reasonable post-tax rate of return for small-hydro assets save to express the expectation that it is likely to be somewhere in the region of 5.5 per cent to 7 per cent. The tribunal therefore requested assistance from the parties' experts.34
The RWE case refers to an investment in four hydroelectric plants and 16 wind farms under RD 2818/1998, RD 436/2004 and RD 661/2007.
Here, the tribunal found that Spain had violated the obligation under Article 10(1) of the ECT to accord the claimants Fair and Equitable Treatment.35
The tribunal rejected that the claimants' had a legitimate expectation to the continued application of the Special Regime FIT for the entire useful life of its renewable energy installations. Rather, the tribunal found Spain's regulatory measures to have breached the ECT because of the disproportionate impact that they had on certain claimants' installations. In the words of the tribunal 'the Tribunal considers that, in certain respects, the Claimants are having to bear an excessive burden so far as concerns the measures adopted to deal with the Tariff Deficit'.36 As was the case in RREEF, the tribunal instructs the parties to reach an agreement on certain quantum issues to accurately determine the damage suffered by the claimants, in accordance with its findings on liability.
Unlike the tribunal in RREEF, the tribunal found no issue with the 'claw-back' effect of the New Regime (i.e., the reduction (or elimination) of a plant's remuneration going forward as a result of remuneration it received in the past). However, the tribunal did find that to the extent that certain of the claimants' installations (those which no longer receive subsidies under the New Regime) had to repay amounts received between the approval of RDL 9/2013 and Order IET/1045/2014, this was a breach of the ECT.
In sum, the tribunal found that Spain breached Article 10(1) of the ECT in two ways: (1) through the mandatory repayment by certain installations of amounts received between the approval of RDL 9/2013 and Order IET 1045/2014; and (2) to the extent that certain plants are earning returns (based on actual investment costs) below a pre-tax return of 7.398 per cent.
In the final award, the RWE tribunal determined that the damages caused by Spain's Disputed Measures to RWE amounted to €28.08 million.37
This case refers to claimants' investment in two wind farms under RD 661/2007. Like the tribunal in RREEF, the tribunal found that Spain's 'claw-back' effect of the New Regime (i.e., the way it uses past revenues to calculate future remuneration) constitutes a standalone breach of the Fair and Equitable Treatment standard by itself pursuant Article 10(1) of the ECT. The tribunal thus found that claimants were entitled to be compensated for the effect this had on the revenues of its wind plants.38
The tribunal dismissed claimants' remaining claims. Regarding the Fair and Equitable Treatment claim, although the tribunal acknowledged that most tribunals 'have sought to distinguish between strict compliance with the status quo before 2013 . . . and substantial abandonment of the system support altogether',39 the tribunal notes that, 'by majority, it does not discern a general breach of the FET standard embodied in Article 10.1'.40
The tribunal grounded its decision by noting that 'the investment was made . . . at a time when the economic situation was problematic and was acknowledged by Parliament and the Supreme Court' and that RDL 6/2009 referred to the 'serious problems . . . affecting the system' and the 'imbalance [was] unsustainable'. It also affirmed that 'there was limited due diligence' and 'no specific or binding representations were made by Spain to the investors'.41
The tribunal therefore concluded that Spain breached Article 10(1) of the ECT by 'clawing-back' the revenues of the claimants' wind plants. Accordingly, the tribunal ordered the parties to calculate the resulting damages pursuant to certain guidelines.
The claimant in FREIF invested in six wind facilities on 14 October 2011.42 The wind facilities had qualified under RD 661/2007.
Spain raised two jurisdictional objections in this case: (1) an Intra-EU Objection alleging that the tribunal lacked jurisdiction because intra-EU investments are the exclusive competence of the judicial institutions of the EU as noted in the Achmea judgment, rendered during the course of the proceedings; and (2) a Taxation Carve-Out Objection noting that the 7 per cent levy established by Law 15/2012 was outside the tribunal's jurisdiction as a result of taxation carve-out in Article 21 of the ECT. With regard to the Intra-EU Objection, the tribunal rejected it. In connection with the Taxation Carve-Out objection, the tribunal upheld it, rejecting the proposition that the measure had been implemented in bad faith by the state to avoid performing its obligations under the ECT.
The tribunal in FREIF rejected the claimant's claim that Spain's Disputed Measures had violated the FET standard in Article 10(1) of the ECT.43
The FREIF tribunal's findings were based on the evidence before it. Importantly, the FREIF tribunal held that both the documentary and witness evidence admitted in the arbitration showed that FREIF was aware that changes to the RD 661/2007 regime were possible when it invested.44 In particular, the tribunal relied on a due diligence memo provided by Linklaters to FREIF, which expressly stated that the Spanish government could make changes to RD 661/2007, so long as the compensation given under the regime continued to fulfil the requirements of Article 30.4 of Law 54/1997 and provided investors with a reasonable return. The Linklaters memo also stated that the Spanish Supreme Court had established that the government could make amendments to the tariff regime provided that those amendments still satisfied Article 30.4 of Law 54/1997. Moreover, one of FREIF's witnesses accepted that FREIF was aware of the Supreme Court's position and of the possibility of minor changes to the regime.
While Linklaters did opine that only minor changes were likely to be made, and that major changes were unlikely because the government would face political challenges in making them, the FREIF tribunal held that this should have put FREIF on notice that such changes were possible. Thus, FREIF could not have a legitimate expectation at the time it invested that the RD 661/2007 FIT would remain unchanged during the lifetime of its plants, based on the memo and on its alleged awareness of the Supreme Court's position.
The FREIF tribunal did find, however, that FREIF had a legitimate expectation to a reasonable rate of return.45 On the basis of the calculations presented before it, however, the FREIF tribunal concluded that Spain's New Regime continued to provide the claimant with a 'reasonable return'.46
iii The three judgments of the Constitutional Court about the limits of the jurisdictional control of awards
Here we focus on three judgments from the Spanish Constitutional Court that have had an extraordinary impact on the arbitration in Spain.
These judgments are so relevant because they definitively establish the rules for the jurisdictional control of awards, a controversial issue in Spain for almost the past 10 years. These judgments have openly addressed the recent case law of the TSJM to correct it so that the arbitration institution in Spain has recovered its solvency, credibility and legal certainty.
The first of the judgments, dated 15 June 2020, refers to a case in which the tenants of a lease agreement submitted to arbitration brought an action before the TSJM for the annulment of an award by which they were ordered to pay various rental instalments, as well as to vacate the property. After initiating the action for annulment of the award, the parties reached an out-of-court agreement that concluded the dispute and filed a joint brief of allegations with the court requesting the termination of the annulment proceeding.
The TSJM rejected this request, understanding that, without prejudice to the general powers of disposition of the parties in civil proceedings, the judicial process of annulment of awards does not belong to the parties. For the TSJM, the competence of the courts is to preserve public order so there is a general interest in purging those awards that are contrary to the legal system, reiterating its previous case law on the annulment of awards.
The TSJM thus ruled, despite the parties' agreement to terminate the dispute, annulling the arbitral award (STSJ de Madrid 33/2017). This judgment was appealed before the Constitutional Court by the parties for violation of the right to effective judicial protection (Article 24 CE). The Constitutional Court upheld the appeal.
The second judgments, dated 15 February 2021, follow the June 2020 ruling's reasoning. The matter refers to an arbitration in Equity to which the dissolution and liquidation of a family company was submitted. Three of the shareholders brought actions against the controlling shareholder on the grounds of an alleged abuse of his position of control of the company (he held the majority of the voting rights but only the 27.46 per cent of the capital). The award upheld the claim.
However, the TSJM upheld the annulment action filed by the defendant on the grounds that the award lacked reasoning. According to the TSJM, the award breached the public order by not weighing all the evidence, omitting some documents that the TSJM considered relevant and not taking into consideration case law by the civil jurisdiction. Again, the Constitutional Court upheld the appeal.
Last, the third judgment, dated 15 March 2021, consolidates the doctrine established in the previous two. The Spanish Constitutional Court has made it clear that the grounds developed and explained regarding the boundaries of the jurisdictional control of awards are to be observed by every court that deals with arbitration in Spain.
In this case, an arbitral tribunal issued an award relating to a franchise agreement. The party condemned to pay filed for the annulment of the award. Nevertheless, prior to the conclusion of the proceedings, the parties reached an out of court agreement settling the dispute. Here again the TSJM ruled, despite the parties' joint request to terminate the proceedings, for the annulment of the award. The Constitutional Court, following its own decision dated 15 June 2020, upheld the appeal.
Legal grounds addressed by the Constitutional Court in the three judgments
The three judgments have in common the effort by the Constitutional Court to clarify several legal grounds whose concept and limits have been confused by courts for the past years. The Constitutional Court has therefore established the case law that should be followed onwards regarding:
- Party autonomy: for the Constitutional Court, the right to effective judicial protection enshrined in Article 24 Constitución Española (CE), has an inalienable and unavailable character. However, this does not prevent it from being considered constitutionally legitimate to voluntarily and temporarily waive the exercise of judicial claims and choose to submit the dispute to arbitration. In this way, it is made clear that arbitration finds its legitimacy in Article 10 CE and not in Article 24 CE. Therefore, in arbitration the minimal intervention of the jurisdictional courts reflects the respect for the autonomy of the will of the parties who have decided to remove their disputes from the ordinary jurisdiction and who freely choose that the only jurisdictional control of their process will be that which is strictly established by Article 41 of the Arbitration Act.
- Public order: the Constitutional Court refreshes the concept of public order consolidated by constitutional case law. The material public order is delimited and defined as the set of public, private, political, moral and economic legal principles, which are absolutely mandatory for the preservation of society. And the procedural public order is the set of necessary formalities and principles of our procedural legal system. Only arbitration that contradicts any of these material or procedural principles can be declared null and void for violation of public order. The courts cannot, with the excuse of an exorbitant concept of violation of public order, review the merits of a matter submitted to arbitration and replace the role of the arbitrator. Public order cannot become a mere pretext to re-examine the issues debated in the arbitration proceedings when there is no more than a mere disagreement with the decision issued by the arbitrator.
- Dispositive principle: in judgments dated 15 June 2020 and 15 March 2021, the Constitutional Court considers that it is correct to establish that the parties cannot freely dispose of the object of the annulment proceedings when an element of public order is present. But in these cases, the parties wanted to terminate the proceedings because they had obtained an out of court agreement on the economic obligations recognised in both awards. For this reason, regardless of whether the cause for annulment was claimed to be public order, the fact is that the substantive issue underlying the disputes was private. And according to the Spanish procedural system, if the parties have no interest in litigating, the proceeding cannot be continued, nor can a decision be issued.
- Motivation: the judgment dated 15 February 2021 analyses the duty to state reasons. In that case, the reason that led the TSJM to annul the award was its apparent lack of motivation. However, that lack of motivation was in fact considered by the Constitutional Court just a discrepancy with the arbitrator's reasoning on the assessment of certain evidence and precedents. For the Constitutional Court, the motivation regarding awards is not based in Article 24.1 CE, applicable only to judicial and not arbitral decisions, but in Article 37.4 of the Arbitration Act. Therefore, the motivation control must be external and it will be sufficient to verify that there are no contradictions within the judgment and that it is not incoherent nor absurd.
- Limits to judicial control of awards: this is the most important legal concept addressed by the Constitutional Court and serves as a conclusion of all the above. The action for annulment of awards must be understood as a process of external control over the validity of the award that does not allow a review of the merits of the arbitrators' decision, because the grounds for review are limited to formal guarantees established as numerus clausus by the law. Therefore, none of the grounds for annulment provided for in the Arbitration Act can be interpreted in any other way. In short, the action for annulment can only have as its object the analysis of possible procedural errors that may have been incurred in the arbitration process, referring to compliance with fundamental guarantees such as: the right of defence, equality, contradiction and evidence or when the award lacks motivation, is inconsistent, violates mandatory legal rules or violates a previous final decision.
These judgments from the Spanish Constitutional Court have been warmly greeted by the arbitration community. Considering that the health of any arbitration system is measured by the ease of recognition and enforcement of its awards and by the respect of its courts of justice for the content of those awards, the arbitration system in Spain has strengthen as a result of these judgments of the Constitutional Court.
Outlook and conclusions
This year has also confirmed that, as in most jurisdictions, judicial decisions in Spain affecting arbitration should be followed closely. As in previous years, judicial decisions continue to analyse the proper balance between supporting and supervising arbitration proceedings, particularly when addressing the correct interpretation and scope of an arbitration agreement. This year the most notable judgments are the three Spanish Constitutional Court judgments mentioned in Section II.iii, which will have an extraordinary impact on the arbitration in Spain as they have established the rules for the jurisdictional control of awards. These judgments have returned solvency, credibility and legal certainty to the arbitration in Spain as alternative dispute resolution.
With respect to international investment arbitration proceedings brought by foreign investors against the Kingdom of Spain, although the majority of the awards issued in these disputes are still in favour of the investors, Spain has seen success after the long line of consecutive defeats. At present, Spain has now lost 17 of the 21 ECT claims brought against it. Many more awards are expected over the coming years.
1 Emma Morales is a counsel and Javier Fernández and Pablo Torres are senior associates at Allen & Overy LLP. The authors are grateful to Millicent Dominguez for her assistance in the preparation of this chapter.
2 Law 60/2003 on Arbitration. For a recent volume that provides a chapter-by-chapter analysis of the SAA in English, see Carlos González-Bueno (editor), The Spanish Arbitration Act: A Commentary, Dykinson, SL (Madrid), 2016. For a text in Spanish that provides a comparative law analysis of the SAA, written by one of the drafters of the SAA, see Fernando Mantilla-Serrano, Ley de Arbitraje, una perspectiva internacional (Madrid): Iustel, 2005 (first edition).
3 United Nations Commission on International Trade Model Law on International Commercial Arbitration adopted on 21 June 1985 (UNCITRAL Model Law) as amended by the United Nations Commission on International Trade Law on 7 July 2006.
4 Law 11/2011 modifying Law 60/2003 on Arbitration.
5 See Articles 2, 3, 8.6, 9.6, 34.2, 39.5 and 46 of the SAA.
6 See the Preamble to the SAA.
7 Inspired by the ICC Rules. See Rule 21.3 (2017 version).
8 See Article 12 of the SAA.
9 See Article 2 of the SAA. The Spanish term is de libre disposición and refers to any and all disputes over matters that are not reserved to the state for their resolution, such as, for example, divorce.
10 Inspired by Swiss private international law. See Article 178 (2) of the Swiss Private International Law statute: '[A]n arbitration agreement is valid if it conforms either to the law chosen by the parties, or to the law governing the subject matter of the dispute, in particular the main contract, or to Swiss law.' Translation by the Swiss Arbitration Association, available at www.arbitration-ch.org/en/arbitration-in-switzerland/index.html (last visited on 9 May 2018).
11 Inspired by French law. See the French New Civil Procedure Code, Article 1504: 'Arbitration is international if it involves the interests of international commerce' (authors' translation).
12 See Article 3 of the SAA.
13 See Article 9.3 of the SAA.
14 See Article 22 of the SAA.
15 See Article 9.1 of the SAA.
16 See Article 9.2 of the SAA.
17 See footnote 10 and accompanying text.
18 See Article 9.6 of the SAA.
19 Royal Decree 413/2014 on the Electricity Sector (RD 413/2014) and Ministerial Order IET 1045/2014 (MO IET 1045/2014, detailing, among other things, the parameters of the new remuneration scheme applicable to producers of renewable energy).
20 Allen & Overy represents a number of investors in some of the ECT claims against the Kingdom of Spain. The observations made in this chapter are based solely on publicly available information.
21 Public sources indicate that 48 ECT claims have arisen out of Spain's changes to its renewable energy sector: see www.iareporter.com/arbitration-cases/?fwp_respondents=kingdom-of-spain (last accessed 25 April 2021).
22 Charanne only concerned measures enacted in 2010 and not the overall reform of the electricity sector introduced in July 2013. The investor in Isolux was part of the same corporate group as the Charanne claimant and acquired its PV plants in October 2012. This investment was deemed to have been made when the subsequent changes were already foreseeable.
23 The PV Investors v. Kingdom of Spain, PCA Case No. 2012-14, Award, 28 February 2020 (English).
24 PV Award, para. 648.
25 PV Award, para. 847.
26 Watkins Holdings S.à r.l. and others v. Kingdom of Spain, ICSID Case No. ARB/15/44, Award, 21 January 2020 (English).
27 Watkins Award, para. 225.
28 id., para. 503.
29 Hydro Energy 1 S.àr.l. and Hydroxana Sweden AB v. Kingdom of Spain, ICSID Case No. ARB/15/42, Decision on jurisdiction, liability and directions on quantum, 9 March 2020.
30 Hydro Energy 1 S.àr.l. and Hydroxana Sweden AB v. Kingdom of Spain, ICSID Case No. ARB/15/42, Award, 5 August 2020.
31 Hydro Decision, para. 673.
32 Hydro Decision, para. 726.
33 Hydro Decision, paras 729–731.
34 Hydro Decision, para. 730.
35 RWE Innogy GmbH and RWE Innogy Aersa S.A.U. v. Kingdom of Spain, ICSID Case ARB/14/34, Decision on jurisdiction, liability and principles of quantum, 30 December 2019, para. 748.
36 RWE Decision, para. 589.
37 RWE Award, para. 119.
38 BayWa r.e. renewable energy GmbH and BayWa r.e. Asset Holding GmbH v. Kingdom of Spain, ICSID Case No. ARB/15/16, Decision on Jurisdiction, Liability and Directions on Quantum, 2 December 2019, para. 602.
39 BayWa Decision, para. 588.
40 BayWa Decision, para. 590.
41 BayWa Decision, para. 590.
42 FREIF Eurowind Holdings Ltd. v. Kingdom of Spain, SCC Case No. 2017/060, Award, 8 March 2021.
43 FREIF Award, para. 691.
44 FREIF Award, paras 545–551.
45 FREIF Award, para. 571.
46 FREIF Award, para. 570.