Over recent years, several High Justice Courts of Spain, especially the one seated in Madrid, have been annulling arbitral awards on the grounds of breach of public policy, pursuant to Article 41.1 f) of the Spanish Arbitration Act.
In this context, the Judgment rendered on 13th of December of 2018 by the Hight Justice Court of Madrid annulled partially an arbitral award in a dispute arose between a Argentinian franchisee and a Spanish franchisor in relation to the breach of a pots-term non-competition covenant in a franchise. The agreement was submitted to Spanish laws.
The annulment proceeding only examined some parts of the arbitration award, which were found to be contrary to public police, due to a wrong application of a mandatory law. The rest of the award was not challenged and therefore was not up to examination of the Madrid High Court.
The challenged part of the arbitration award declared that there had been a breach of the pots-term non-competition covenant of the franchise agreement, and therefore the franchisee should pay the penalty established in the franchise agreement. The EU antitrust legislation was found by the arbitrator to not be applicable do to the fact that the non-competition covenant should had caused its effects outside the European internal market, this is, in the territories of Argentina and Uruguay.
The condemned party (the franchisee) demanded the annulment of this award on the grounds of an alleged beach of public policy, as a consequence of an improper reasoning, because the arbitrator had not taken into account the invalidity of the non-competition clause, that according to the franchisee was contrary to the EU antitrust legislation (which constitutes mandatory law). According to thefranchisee, this legislation is applicable to the franchise contract in accordance to the clause on submission to the Spanish forum.
The Judgement of the High Court of Madrid dated 13th of December of 2018 stated that the arbitrator based its decision injuring a mandatory law (EU antitrust legislation) that protects general interest of primary importance, and concludes therefore, that the challenged part of the award must be annulled since it’s contrary to public policy.
The concept of “public policy” is closely analyzed in the judgement in order to confirm the Court’s ability to review the adequateness and properness of the assessment the arbitrator made with regards to applicability of the EU antitrust legislation.
The concept of public policy is defined as “the conjunction of principles, general norms and fundamental rights of the Spanish legal system” and the Hight Court of Justice of Madrid finds that this concept applies to mandatory legislation such as the EU and Spanish antitrust legislation, since this legislation has an impact the general functioning of the market.
Once confirmed the Court’s ability to review the arbitrator’s assessment due to public policy, the judgement confirmed that the EU and Spanish antitrust legislation was applicable to the franchise contract, and annuls the award due to public policy, since the award based its decision on a patent error relative to mandatory legislation.
Nevertheless, in this case the reasoning of the award was not the only thing that was examined.
The judgement found the withdrawal of the annulment proceeding inadmissible, due to public policy.
Once filled the claim and prior to the delivery of the judgement, the parties filled a withdrawal of the annulment action, which was not accepted by the High Court of Justice on the basis that the validity of an award, that could be contrary to public policy, is an issue of general interest and that no transaction can be accepted in relation to the validity of an award.
In particular, the Hight Court of Justice found that the rules of free competition protect essential general interests that don’t allow a withdrawal in this matter.
One Member of the High Court of Justice issued an dissenting vote to this part of the decision, stating that in his opinion, in this case no public nor private interest can be affected by the exercised withdrawal, since the challenged award resolves a dispute between private parties and its criteria doesn’t set a mandatory precedent, nor has no repercussion beyond the affected parties. Therefore, in his opinion the withdrawal should have been accepted.
The foregoing shows us that Spanish Courts are stretching the concept of “public policy” not only to challenge the assessment made by the arbitrators, but to examine annulments proceedings which are no longer in the affected parties’ interest.
Mercedes Clavell, IDI franchising expert for Spain, and Thais Furrer, Arco Abogados