Constitutional Court again criticises Madrid High Court's review of arbitral awards

Spain's Constitutional Court has reaffirmed a key principle: when parties, exercising their autonomy, agree to exclude court jurisdiction over their disputes, the judiciary must honour that choice in any subsequent annulment proceedings. 

Judicial review of an arbitral award for alleged public policy violations is strictly limited to verifying whether the award contains sufficient reasoning to make the decision understandable. Importantly, judges are not permitted to reassess the arbitral tribunal’s evaluation of evidence or the  exhaustiveness of its reasoning.

In line with this approach, the Constitutional Court, through its plenary judgment of 23 June, presided over by the Honourable Ms Justice Inmaculada Montalbán Huertas, annulled a decision of the High Court of Justice of Madrid, Judgment No. 38/2023 of the Civil and Criminal Chamber, dated 19 October 2023.

Background

The dispute arose from an investment and shareholders agreement dated 20 February 2020 between two companies, "Company A" and "Company B", for the creation and operation of a hotel group. The agreement included a condition precedent requiring the securing of financing, as well as an adverse material change clause triggered by losses exceeding 5% of the agreed price.

When the closing date arrived, Company A refused to fulfil its obligations, arguing that the condition precedent had not been met due to circumstances beyond its control and that health restrictions had caused hotel losses exceeding the contractual threshold.

In response, Company B commenced arbitration before the Madrid International Arbitration Centre. 

The arbitral award

On 13 February 2023, the three-member arbitral tribunal issued an award that partially upheld Company B’s claim. The tribunal found that Company A had breached the agreement by failing to secure the required financing, and ordered it to pay compensation for the suffered damage.

However, the tribunal dismissed Company B’s claim for loss of profits, concluding that there was insufficient evidence that fulfilling the contract would have generated profits. The tribunal cited external factors beyond Company A's control, such as the impact of Covid-19, as key reasons for this decision.

Madrid High Court ruling

Dissatisfied with the rejection of its loss of profits claim, Company B sought partial annulment of the award before the Civil and Criminal Chamber of the Madrid High Court of Justice. Company B argued that the award violated public policy by failing to provide adequate reasoning, as required under Article 37(4) of the Arbitration Act.

The Madrid High Court of Justice, despite the dissenting opinion of its president, the Honourable Mr Justice Celso Rodríguez Padrón, granted the annulment. The court held that, although the arbitral award gave reasons for dismissing the loss of profits claim, it failed to link its factual conclusions to the evidence presented, effectively disregarding the submitted evidence. The court also noted that the tribunal had refused to allow expert cross-examination and had breached the principle of immediacy by replacing the presiding arbitrator during the proceedings.

The High Court overstepped its remit

Company A subsequently filed a constitutional protection application (recurso de amparo) with the Constitutional Court, alleging a violation of Article 24.1 of the Spanish Constitution.

The Constitutional Court upheld the appeal, adopting Company A’s arguments, which were also supported by the Public Prosecutor’s Office. The court held that the arbitral award adequately explained the grounds for rejecting the loss of profits claim, specifically, the failure to prove foreseeable profits, the impact of external factors unrelated to the breach, and the nature of the business project, such that the reasoning could be reconstructed without significant uncertainty.

Specifically, the Constitutional Court stated that it found that the Madrid High Court of Justice interpreted "public policy" too broadly as a reason to set aside the arbitral award. By insisting on a detailed connection between each factual finding and the supporting evidence, the court replaced the arbitral tribunal’s judgment with its own full review of the case’s merits. This approach contradicts article 41(1)(f) of the Arbitration Act, which restricts judicial intervention to checking if the award provides reasons that make the decision understandable, and expressly forbids reviewing whether the evidence was properly assessed or the reasoning was exhaustive. As the Constitutional Court stated: “Constitutional review does not allow for degrees of sufficiency of reasoning…but only the verification of the existence or non-existence of reasons that make it possible to understand the decision.”

Regarding the alleged procedural irregularities, the Constitutional Court observed that Company B had accepted both the refusal to allow expert cross-examination and the decision not to repeat their examinations, without raising objections during the arbitration. Under article 6 of the Arbitration Act, parties aware of any procedural breach must raise it promptly within the prescribed timeframe or at the earliest opportunity); otherwise, they lose the right to rely on that breach as grounds for annulment.

Osborne Clarke comment

This Constitutional Court judgment reinforces a fundamental tenet of arbitration: party autonomy, as protected by article 10.1 of the Spanish Constitution. Judicial review of arbitral awards is an exceptional remedy that must remain narrowly confined in scope. It cannot extend to a merits review of the dispute as decided by the arbitrators, nor can it impose on arbitral tribunals standards of reasoning not required of ordinary courts, as established by consistent Supreme Court and Constitutional Court case law. The judiciary’s role is strictly limited to external review of legality within the framework set by the legislature.