A New Specialised Arbitration Court and Judiciary for Madrid

In 2003, Spain promulgated a new arbitration law 60/2003, (the “Act”) that encapsulated many of the modern concepts of international arbitration. The law adopted the UNCITRAL Model Law of 1985, and advanced Spain to a position whereby it is now a favourable environment for the practice of international arbitration. 

Of course, the practice of arbitration is always dependent on the adherence by the local judiciary to principles embodied in the arbitration law, and the modern practice of international arbitration.  The modern practice of international arbitration essentially means that the courts should ideally observe a minimal yet efficient degree of intervention in arbitral proceedings, and once an award is rendered, the courts should display a clear and consistent understanding of the law concerning the recognition and enforcement of arbitral awards (and the interpretation of the New York Convention 1958).

This has been the challenge for most countries, in terms of being able to say they are truly arbitration-friendly. The statute book can say what it likes, but if it is not backed up by the conduct of state courts, it is worthless. In recognition of this, the international arbitration communities of numerous countries have made concerted efforts to involve the judiciary in any reform, and Spain is no different. Those efforts were realised in Spain when a new state court specialising in arbitration was established in Madrid, Spain (“Court of First Instance N° 101”). This was enacted by virtue of the Agreement of the General Council of the Judiciary, on 25 November 2010 (published in BOE No.310 of 22 December 2010). Previously, in Barcelona –the other principal centre of arbitration in Spain– a specific Section of the Court of Appeal had been granted exclusive competence in relation to actions setting aside arbitral awards rendered in the municipality of Barcelona.

The Spanish court system is divided according to Judicial Districts, which cover one or more municipalities. Each Judicial District is served by a Court of First Instance which covers civil matters.  For most major international arbitrations, the two principal seats of arbitration in Spain are Madrid and Barcelona. As between the two, the majority of Spain-based arbitrations will have Madrid as their seat, and accordingly, in issues concerning, for example, applications for interim measures, applications for assistance with the taking of evidence, and the recognition and enforcement of awards, the Madrid courts may be seized. 

The newly created court is competent for all arbitration matters that previously fell under the jurisdiction of the First Instance Courts of Madrid.  Thus, while the Act transferred the competence of arbitrations matters from the Supreme Court to the Court of First Instance, this new development sees a specialised Court of First Instance being established.    

This development is good news for Spain (and more particularly Madrid) in terms of moving towards a dedicated sitting judiciary whose attention can be focused on international arbitration (although the court does have competence to deal with non-arbitration matters as well).  Subject to the quality of decisions of the new Court, this will also hopefully raise the bar for other arbitration-friendly jurisdictions.

Article 8 of the Act specifies the circumstances in which the Court of First Instance would have had competence before this recent change.  This was derived from the seat of arbitration.  If the seat of arbitration had not yet been determined, then jurisdiction would reside with the Court of First Instance at the domicile or habitual place of residence of any of the respondents, and failing that, of the claimant, or failing that, at the selection of the claimant.

The new Court of First Instance N° 101 will have specific competence in relation to the assistance and supervision of arbitration regarding the following areas (article 8 of the Act):

  1. Judicial requests for the appointment of arbitrators (article 15 of the Act);
  2. Judicial assistance for the taking of evidence in support of arbitral proceedings (article 33 of the Act);
  3. Orders of provisional or interim relief in support of arbitration (article 8(3) of the Act); and
  4. The recognition and enforcement of arbitral awards (article 44 of the Act).

Notably, an application to set aside an arbitral award does not fall within the competence of the Court of First Instance N° 101, and remains within the competence of the Provincial Court of Appeal.  This may seem surprising to those who have read BOE No.310 of 22 December 2010, since that agreement expressly indicates that setting aside the award would seemingly fall within the competence of the Court of First Instance N° 101.  However, Spain’s Organic Law which stipulates that such an application falls exclusively within the jurisdiction of the Provincial Court of Appeal cannot be trumped by the Agreement of the General Council of the Judiciary.  Therefore, its appearance in BOE No.310 of 22 December 2010 is an error.  This has been confirmed by the judge who will preside in the Court of First Instance N° 101, Judge Begoña Pérez Sanz.

It is most welcome that a dedicated judiciary can develop Spanish jurisprudence with a sense of ownership and hopefully, a non-hostile attitude to the role international arbitration plays in the domestic and international legal order.

The only exception to the competence of the Court of First Instance N° 101 is that certain subject matter competencies remain with the Commercial Courts.  For example, intellectual property disputes, unfair competition matters, transport and some corporate disputes, even if raised in the context of an arbitration, will remain within the jurisdiction of the Commercial Courts.  This is unfortunate and rather unsatisfactory.  If the Court of First Instance N° 101 is designed to achieve consistency in the treatment of international arbitration, it undermines its own raison d’être if there is such an exception simply predicated on the subject matter of the dispute. 

Conclusion

It remains to be seen whether this anomalous competence of the Commercial Courts will be removed during the passage of the new Arbitration Act which is currently before the Spanish Parliament. In the meantime, however, this development is extremely positive for the development of international arbitration in Spain.

            Christian Leathley and Ignacio Diez-Picazo

            Christian Leathley is Of Counsel at the law firm Herbert Smith (London) and a specialist in international arbitration. He is English and New York qualified and a former graduate of NYU School of Law (LL.M in International Legal Studies). 

            Ignacio Diez-Picazo is Partner at Herbert Smith (Madrid) and Chaired Professor of Procedural Law at the Faculty of Law of the University Complutense of Madrid.

Reaching A Settlement Before the Arbitration Hearing

Will a court injunct arbitral proceedings if parties, before an arbitration hearing, allegedly reach a settlement agreement and a dispute subsequently arises over the existence of such an agreement? Is the tribunal functus?

Recently, the Singapore High Court in Doshion Ltd v Sembawang Engineers and Constructors Pte Ltd [2011] SGHC 46 (“Doshion”) rightly held that no injunction would lie in such an instance. It is a decision to be welcomed.

In that case, the two parties were parties to arbitration proceedings under certain construction contracts (“the Sub-Contracts”). The arbitration was scheduled to start on 28 February 2011. The claimant contended that an oral settlement was reached between the solicitors for the parties on 15 February 2011 and the arbitration proceedings should be terminated as of that date. The defendant denied the existence of any settlement.

The defendant characterised the claimant’s argument as one where the tribunal had become functus officio because of the settlement. The defendant cited a recent English High Court decision of Martin Dawes v Treasure & Son Ltd [2010] EWHC 3218 (“Dawes”) and contended that the issue of whether an arbitrator was functus went to the jurisdiction of the arbitrator, which was a matter for the arbitrator to decide.

In finding for the defendant, the Singapore High Court’s reasoning was built on three pillars:

(a) the arbitrator was not functus since the tribunal had not even begun to hear the dispute;

(b) adopting the commercially sensible approach in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, that an dispute over the existence of an settlement agreement would be caught by the ambit of the arbitration agreement in the Sub-Contracts; and

(c) in any event, any dispute about the scope of an arbitration agreement was a matter for the arbitral tribunal based on the doctrine of Kompetenz-Komptenz.

It was not strictly necessary for the defendant to characterize the plaintiff’s argument as one relating to functus officio – the plaintiff faced an uphill task from the get go. Section 6 of Singapore’s International Arbitration Act (the Act incorporates the Model Law) requires a court to refer the dispute to arbitration unless the agreement was “null and void, inoperative or incapable of being performed”. In Tjong Very Sumito v Antig Investments Pte Ltd [2009] SGCA 41, the Singapore Court of Appeal astutely held that in line with its prevailing philosophy of judicial non-intervention in arbitration, the Court would interpret the word “dispute” in Section 6 broadly, and would readily find that a dispute existed unless the defendant had unequivocally admitted that the claim was due and payable. In circumstances where the defendant prevaricates (i.e., first making an admission and then later purporting to deny the claim on the ground that the admission was mistaken, or fraudulently obtained, or was never made), the matter would ordinarily still be referred to arbitration. The Court’s approach is commendable in giving full effect to the parties’ specified mode of dispute resolution.

When we apply this reasoning to Doshion, whether any alleged settlement was reached before or during the arbitral hearing would not, as a matter of principle, affect the question of which fora decides whether the settlement exists. It is important to ask the right question. That question is whether the underlying dispute remains unresolved. Any settlement would be in relation to the underlying dispute arising out of the Sub-Contracts. Accordingly, any dispute about the settlement originates from the underlying dispute. To answer the question, any dispute about the settlement means that the underlying dispute remains unresolved. So unless the defendant unequivocally admits the claim or acknowledges that there has been a settlement such that there is no longer a dispute, the Court will refer the matter to arbitration. Conceptually, since any prevarication by the defendant on the admission of the claim would be a matter to be referred to arbitration, any prevarication by the defendant on the settlement of the claim must have the same outcome.

This reasoning based on first principles would have been sufficient to dispose of Doshion. The claimant did not, and presumably could not, show that there had been a waiver of the arbitration agreement or an agreement to end the tribunal’s jurisdiction.

The going only gets tougher for the claimant if it embarks on the functus officio route. Akenhead J in Dawes rejected the argument that a tribunal becomes functus once a settlement has been reached during arbitral proceedings.

In Dawes, the claimant (Dawes) engaged a contractor (Treasure) to carry out construction works at his country estate. Disputes arose and Treasure commenced arbitration proceedings before Mr Ian Salisbury. After the parties had pleaded their respective cases, they agreed upon a settlement. However, the scope of the settlement was not documented in a consent order or final award. Subsequently, Dawes issued his own arbitration notice in respect of related disputes but appointed a different arbitrator. Treasure asked Mr Salisbury to rule that he retained jurisdiction in relation to the “new” dispute, and that it had been compromised by the settlement agreement. The first arbitrator ruled in favour of Treasure on both points, which was challenged by Dawes on the ground that Mr Salisbury was already functus officio after the settlement.

In dismissing Dawes’ application, Akenhead J relied on, inter alia, Section 51 of the English Arbitration Act 1996. Section 51 provides that if parties settle the dispute during arbitral proceedings, the tribunal shall terminate the substantive proceedings and, if so requested, produce a consent award. Accordingly, Akenhead J held that the settlement of a dispute after it had been referred to arbitration, but before any final award, did not generally bring an end to the arbitrator’s jurisdiction and make him functus officio. Even if the dispute was settled “there remains a jurisdiction to terminate the substantive proceedings and to resolve issues of costs or any other matters in dispute”. That jurisdiction was otherwise not statutorily limited, and neither did parties preclude or limit such jurisdiction in their settlement.

Akenhead J also observed that Mr Salisbury “would undoubtedly still have retained jurisdiction if there had been an issue between the parties as to whether there was any settlement at all. He would still have been the arbitrator to resolve the underlying disputes which would include ruling upon a defence that the claim had been settled.”

The Model Law’s counterpart of Section 51 of the English Arbitration Act is found in Article 30 which deals specifically with settlement. The lesson taught by the two cases highlighted here is that if a party wants to put an end to a tribunal’s jurisdiction immediately after settlement, it will generally have to show an agreement to end the tribunal’s jurisdiction, whether as part of the settlement itself or as a separate agreement. Unfortunately for the claimant in Doshion, there is no shortcut.

Darius Chan

Darius Chan is a candidate for the LLM in International Business Regulation, Litigation & Arbitration at NYU. He is qualified in Singapore and New York. Upon graduation he clerked at the Supreme Court of Singapore and was concurrently appointed an Assistant Registrar. He was also adjunct faculty at the law schools of National University of Singapore and Singapore Management University. Prior to the LLM, he practised international arbitration at the chambers of Michael Hwang SC.

A View from the Mountain Top: A Challenge to International Arbitral Practice in Thomas Mann’s Magic Mountain*

Switzerland may be one of the world’s most important arbitral seats, even so one would scarcely expect arbitration to hold much interest for the tubercular residents of Davos in Mann’s novel Der Zauberberg or The Magic Mountain.  Yet aficionados of arbitration who persevere to the sixth chapter of his lengthy book are treated to a little exchange on the subject.  In a usually overlooked passage, the Italian Ludovico Settembrini, purporting to speak as the voice of progress, and the conservative Jesuit Leo Naphta cross swords over the merits of arbitration during an afternoon of tea and chocolate “Baumkuchen” cake in the company of the main character Hans Castorp and his cousin Joachim Ziemßen.

Mann began The Magic Mountain in 1912 only to interrupt its composition during the First World War.  The novel, which first appeared in 1924, tells of the adventures of Hans Castorp, an otherwise prosaic young German of heightened sensibilities, in the fictional Berghof sanatorium in Davos during the seven years leading up to the First World War.  The routine of sanatorium life, the medical minutiae of early twentieth-century treatment of tuberculosis and the motley constellation of its sufferers in Davos become the vehicle for the hero’s coming of age and an exploration of pre-First World War culture.  The novel is not rich in external action and reflections on the arbitral process and much else remain confined to the drawing-room.

Settembrini and Naphta do not shirk difficult subjects.  Indeed the complexity of their topics is proportionate to the impotence of two sick men trapped on a mountain top.  In a series of virtuoso rhetorical exchanges, they debate illness, the nation state, education, penal reform, free trade and the progress of human history.  Settembrini adopts the view that mankind is not only capable of progress but that the previous century has brought great progress already, while Naphta sees the human condition as unrelievedly bleak, miserable and entirely dependent on divine grace for salvation. 

Unsurprisingly given these basic positions, it is Settembrini who comes out in favour of arbitration as an effective means for solving international disputes and Naphta who condemns it as one of the vain hopes of a deluded bourgeoisie.  Settembrini looks to arbitration as a way of resolving disputes, in particular those which will inevitably arise between nation states, in a rational and peaceful fashion.  To Settembrini arbitration is a forum whose jurisprudence can transcend the constraints of national, positive law and can be derived from natural law or international law, which he conflates in a speech to Naphta:

“What I venerate as natural law or the law of nations, you are free to call ius divinum.  The main thing is that there is a higher general law that transcends the positive rights of nation states and that allows for the resolution of disputed interests through arbitral tribunals.”

Naphta’s reaction is skittishly dismissive: “Arbitral tribunals, indeed!  The very idea of them!  A bourgeois arbitral tribunal that rules on questions of life and death, divines God’s will and determines the course of history!”  Writing in the aftermath of the First World War, Mann had an easy time showing up the hopelessness of Settembrini’s belief in international arbitration.  The nation states of Europe had succumbed to war and carnage rather than appointing tribunals to resolve their disputes.  This will not have been lost on his readers. 

Settembrini’s project challenges the latterday arbitral practitioner with its unanswered questions rather than its grim historical ironies.  Almost a century after the novel was published, controversy surrounds the powers that Settembrini attributes to arbitral tribunals.  Although arbitration is widely accepted as the preferred means of resolving international commercial disputes, its legitimacy in relation to investment and interstate disputes is sometimes put in doubt.  Some jurists question whether private tribunals should decide over the interests of sovereign states at all as Settembrini envisages.

To Settembrini arbitration is superior to other forms of dispute resolution by virtue of transcending the constraints of positive law and deriving its principles directly from reason rather than statute.  Such principles are supranational since they originate in universal rationality as opposed to a given national legal tradition.  Settembrini’s bold claim foreshadows the impassioned debate surrounding the lex mercatoria as a supranational legal set of commercial principles applicable to international arbitration.  Sceptics would say the content of such principles is as obscure now as it is in Mann’s novel. 

Naphta’s cavalier dismissal of Settembrini’s “bourgeois” arbitral tribunals formulates the greatest continuous challenge to all arbitration practitioners, to show that parties, their counsel and their tribunals are able to agree to arbitrate, generate meaningful awards and implement them.  Only then can arbitration offer an alternative to the constraints of national courts and indeed change the course of history.  Whatever the challenges of arbitrating disputes successfully, arbitration is preferable to Naphta’s alternatives.  At the end of the novel, after a succession of heated arguments, Naphta challenges Settembrini to a duel, who then deliberately shoots past him.  Infuriated Naphta thereupon turns his gun on himself.  One wonders if they might not have tried ADR instead.

* The authors wish to thank King’s College London for granting them access to the German collection in the Maughan Library when they were preparing this article.

            Maxi Scherer and Daniel Greineder

Dr. Maxi Scherer is a Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London.  She is a member of the Paris bar and a solicitor (England and Wales).  She graduated from University of Paris Panthéon-Sorbonne, France, and University of Cologne, Germany, and obtained her PhD at the University of Paris Panthéon-Sorbonne with highest honors.  Maxi Scherer teaches International Arbitration and Litigation, International Private Law, European Civil Procedure and Comparative Law. She is an adjunct professor at SciencesPo Law School Paris, Georgetown CLTS London, University of Melbourne, Pepperdine Law School London and University of Fribourg.

Daniel Greineder is an Associate in the arbitral practice of Python & Peter in Geneva and an English-qualified barrister.  Previously he worked in the Arbitration Group of Wilmer Cutler Pickering Hale and Dorr LLP in London.  Before being called to the Bar by the Inner Temple in 2005, he completed a doctoral thesis in eighteenth-century German literary theory at Magdalen College, Oxford, and  lectured on German literature at St Hilda’s College, Oxford.