The First Chamber of the Constitutional Court (TC – Tribunal Constitucional), in its recent Ruling of 15th February 2021, upholds the appeal for legal protection filed against the ruling – and the subsequent court order dismissing the motion for nullity initiated against said ruling – of the Civil and Criminal Chambers of the High Court of Justice of Madrid (TSJM – Tribunal Superior de Justicia de Madrid), in which, within the framework of the procedure of annulling the arbitral award number 52-2017, the TSJM agreed to annul the contested arbitral award, for a violation of public policy.
Case background
The procedural facts and background which have given rise to the appeal for legal protection filed before the TC are the following:
a) The fundamental question arises from the conflict between the minority partner (shareholder) and the majority partner (shareholder) of a company (SL – limited company).
b) In the bylaws of the SL, issues which may arise between the partners (shareholders) and the company, or among themselves directly, are submitted to arbitration in equity.
c) In April 2016, the minority partners (shareholders) formulated an arbitration in equity claim against the majority partner (shareholder) and the SL for violating the rights of their position of control, and also for the loss of the affectio societatis, requesting the declaration of their separation right, or the dissolution and liquidation of the SL.
d) In April 2017, an arbitral award was pronounced in which the dissolution of the SL was declared, with the consequent initiation of the liquidation process, along with the termination of directors. Said ruling was clarified with the award of May 2017.
e) The majority partner (shareholder) challenged the arbitral award with the argument that it violates public policy, for it decreed the dissolution and liquidation of the SL without there being any legally or statutorily determined cause. The partner (shareholder) also challenged the reasoning and review of the evidence given by the arbitrator in equity.
f) In January 2018, the TSJM passed a judgement upholding the claim for the annulment of the arbitral award of April 2017 – and of the clarifying award of 2017 –, declaring the nullity of both.
Of the three reasons put forward by the majority partner (shareholder), the TSJM dismissed the first two, given that:
1) The act of decreeing the dissolution of a company due to the violation of the rights of a partner (shareholder) and the loss of affectio societatis, equating it to the legal causes, such as the evident impossibility of achieving the corporate goal or the paralysation of corporate bodies, does not in itself infringe public order, since in such cases, jurisprudence would allow the dissolution of the company.
2) The pronouncements of the award, specifically the dissolution and liquidation of the company, do not violate the effective legal protection – article 24.1 of the Spanish Constitution (CE – Constitución española) in relation to the principle of res judicata –, given that the final legal judgements issued in pre-existing law suits between the partners (shareholders) of the SL do not contradict the pronouncements of the award.
Nonetheless, the TSJM upheld the alleged violation of the public order ex article 41.f) of the Arbitration Law (LA – Ley de Arbitraje), for the infringement of the right of effective legal protection (article 24.1 CE), for the award did not respond to all questions posed in the arbitration, evidence was not assessed in its entirety, the arguments in its favour were not supported, and, finally, the award was considered arbitrary due to the lack of a sufficient reasoning.
g) In opposition of said ruling, the minority partners (shareholders) filed an exceptional ancillary suit for the nullity of proceedings, which was dismissed by the TSJM through a court order dated 25th May 2018.
h) Next, the minority partners (shareholders) filed an appeal for legal protection before the TC against the ruling and the court order issued by the TSJM, for the violation of the right to effective legal protection (article 24.1 CE), in the aspect of the right to a reasoned decision which is not unreasonable, arbitrary or and does not contain a patent error.
i)The majority partner (shareholder), for its part, requested the TC to reject the appeal for legal protection.
j) However, the Public Prosecution Service made the idea of upholding the appeal more attractive to the TC, challenging the ruling of 8th January 2018 and the decree of 22nd May 2018 on the basis that they violate the right to effective legal protection.
Ruling of the Constitutional Court, of 15th February 2021
In its ruling of 15th February 2021, the TC upholds the appeal for legal protection filed by the minority partners (shareholders) and endorsed by the Public Prosecution Service, referring to the constitutional doctrine contained in its judgement 46/2020, of 15th June, based on these three lines of argument:
I. The concept of public policy as the cause of the annulment of the arbitral awards (article 41.f) LA) must be interpreted in a limited way. Thus, the TC indicates that the use of public order as a reason “does not allow for the replacement of the criteria of the arbitrator in equity by the judges hearing the annulment of the award. (…) The action of annulment is neither a second instance (hearing) for the revision of the facts and the rights applied in the award, nor a control mechanism of the correct application of jurisprudence. Therefore, it must again be noted that, if the arbitral resolution cannot be labelled as arbitrary, illogical, absurd or irrational, its annulment cannot be declared on the basis of public order”.
II. Regarding the reasoning for the awards, the TC affirms that the duty to state reasons in legal resolutions is not of the same nature as that in the arbitral awards, “because dealing with legal resolutions is a requirement inherent in the law of effective legal protection ex article 24 CE. However, for the arbitral resolutions, said obligation appears in article 37.4 of the Spanish Arbitration Law (LA – Ley de Arbitraje), always with the exception that the parties, furthermore, have not reached an agreement regarding the terms in which the award should be pronounced”.
Furthermore, the TC indicates that “only when an award is unreasonable, arbitrary or has committed a patent error can it be attributed with a defect which violates article 37.4 LA (and we repeat, not article 24.1 CE)”. It adds that “article 37.4 LA only establishes that “the award will always have reasons”, but it does not expressly stipulate that the arbitrator in equity must make a decision on all of the arguments presented by the parties, or that they must indicate the evidence on which they have based their decision regarding the facts, or which led to their preference of one piece of evidence over another”.
III. Regarding arbitration in equity, the TC establishes that “when the parties are subject to an arbitration in equity, although this does not necessarily exclude the possibility that the arbitrators reinforce “their knowledge and understanding” with legal knowledge, they are able to discard legal norms and resort to a different line of reasoning from that which follows from their application, because that which is solved ex aequo et bono must be decided by fair and equitable lines of reasoning”.
The TC adds that “the arbitration tribunal is the only body which can legitimately opt for a solution which it considers fairer and more equitable, bearing in mind all of the circumstances of the case, including if said solution is incompatible with that which would result from the application of the regulations of substantive law.
Having established the above, the TC concludes that “the action of annulment, which is an extreme and exceptional solution which cannot be based on purely formal offences, but must solely serve to resolve situations of a real, effective lack of defence or violations of fundamental rights, or to protect the Spanish public order, hence suggesting that any violations of the procedure, which have no material encumbrance on the rights or legal situation of the parties, do not serve as valid reasons to obtain the annulment of the awards”.
And finally, the TC understands that the decision of the TSJM to annul the arbitral award for insufficient reasoning (article 37 LA) is contrary to the standard of reasonableness of the legal decisions (article 24.1 CE). As a result, (1) it declares the violation of the right to effective legal protection without any lack of defence – for infringing article 24.1 CE – of the petitioners for protection, (2) it declares the nullity of the ruling and the court order of the TSJM, and (3) it takes the proceedings back to the moment before the passing the ruling, so that the TSJM may make a decision respectfully, recognising fundamental rights.
Comment
As the reader will likely be able to imagine, the judgement of 15th February 2015 is being widely commented upon and praised by the arbitral community, both nationally and internationally, since it clearly determines the scope of the judicial control of the awards in Spain, it reiterates that the action of annulment of the awards is an extreme and exceptional solution which can only be applied to errors in procedendo, and it defines the notion of the public order ex article 41.f) LA. Because of this, it represents a great advancement in the direction of equating judges and arbitrators, and providing legal security to controversial decisions by means of arbitration.
Carla Villavicencio
Vilá Abogados
For more information, please contact:
12th March 2021
