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JUDGMENT OF THE SPANISH SUPREME COURT 102/2017 LIABILITY OF ARBITRATORS: THE “PUMA” DECISION

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JUDGMENT OF THE SPANISH SUPREME COURT 102/2017 LIABILITY OF ARBITRATORS: THE “PUMA” DECISION

08 marzo 2017

Procedural Background:

Procedural Background: This judgment of the Spanish Supreme Court originates in an arbitration agreement in a distribution contract between the Puma AG RDS (“Puma”) and the Spanish distributor of its products, Estudio 2000, S.A. (“Estudio 2000”). In an ad hoc arbitration between the Parties to this distribution agreement, the defendants (Mr. Temboury Redondo & Mr. Ramallo García) were the arbitrators appointed by the Spanish distributor and the president of the arbitral tribunal, respectively. The arbitrator appointed by Puma was Mr. Gastón de Iriarte.

The arbitral tribunal issued an award dated June 2, 2010 ordering Puma to pay Studio 2000 the amount of EUR 98.19 million. The award was signed by the arbitrators-defendants, but not by the arbitrator appointed by Puma.

On June 10, 2011 the Provincial Court of Madrid set aside the award (Judgment nº 200/2011) on the basis that the arbitral tribunal had deliberated, voted and issued the award without the participation of the arbitrator appointed by Puma in breach of the principle of arbitral collegiality, which constituted an infringement of the right of defence and in turn a violation of public policy (see Article 41.1(f) of the Arbitration Law, and Article 24 of the Spanish Constitution).

Estudio 2000 resubmitted its claim before a new arbitral tribunal. This second arbitration ended with an award of damages 60% lower than that one in the original arbitration.

Puma then commenced court proceedings against the arbitrators-defendants seeking the recovery of the fees paid by Puma to them (amounting to EUR 750,000 for each defendant). The action was based on Article 21.1 of the Arbitration Law, which reads (in part) as follows:

“Article 21. Responsibility of the Arbitrators and of the Arbitral Institutions. Provision of Funds. Acceptance obliges the arbitrators and, where applicable, the arbitral institution to comply faithfully with their responsibilities, being, if they do not do so, liable for the damage and losses they cause by reason of bad faith, recklessness or fraud. Where the arbitration is entrusted to an arbitral institution, the injured party shall have a direct action against the institution, regardless of any actions for compensation available against the arbitrators.”

On September 20, 2013 the Court of First Instance No. 43 of Madrid found the arbitrators-defendants liable (ordinary proceeding 1880/2012) on the basis that the award has been issued recklessly, finding that the Defendants had been guilty of a ‘manifest, serious and inexcusable error’ in believing that they could issue a majority award without convening further with the third arbitrator. For the court, the arbitrators-defendants had stonewalled the third arbitrator and took the opportunity to hold the deliberations, issue and notify the award when they knew that the third arbitrator was travelling. The Judge noted that collegiality is a fundamental principle of arbitration, recognized in Articles 35 and 37 of the Spanish Arbitration Law, and furthermore that deliberation is the manner of forming the will of an arbitral tribunal, which is known by those, such as the Defendants, who are lawyers by profession. The court also made an award of costs against the arbitrators-defendants. The defendants appealed.

On October 27, 2014, the Provincial Court of Appeal of Madrid affirmed the decision of the Court of First Instance (Appeal 75/2014), and imposed costs on the arbitrators-defendants. The defendants again appealed. The Supreme Court confirmed the liability of the arbitrators-defendants, also ordering them to pay the costs of the proceedings.

The Supreme Court Judgment

An unofficial translation of the Supreme Court judgment dated February 15, 2017 is enclosed. The opening section of the Judgment (‘Factual Background’) deals with procedural issues relating to the grounds for appeals to the Spanish Supreme Court. The next section of the judgment (“Legal Grounds”) provides the reasoning for the dismissal of the appeal.

The proven facts regarding the circumstances of the issue of the award by the arbitrators-defendants are set out in points (i) to (vi) of the First Legal Ground. The legal reasoning of the Supreme Court in respect of the liability of an arbitrator pursuant to Article 21.1 of the Arbitration Law appears in the Second Legal Ground.

Puma was represented in the second arbitration, as well as in all instances before the Spanish courts, by partners Bernardo Cremades, Angel Tejada and Javier Juliani and associate Rodrigo Cortes of the law firm of B. Cremades & Asociados. Andrea Pinna of De Gaulle Fleurance & Associes in Paris acted as co-counsel.

B. Cremades & Asociados
Madrid, 1 March 2017

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