Spanish Supreme Court declares arbitrators liable for excluding colleague Spain's Supreme Court in Madrid
After the first known annulment of an arbitral award for violation of the principle of collegiality of the tribunal – in a dispute between sportswear brand Puma and its former Spanish distributor – the Spanish Supreme Court has declared two of the three arbitrators professionally liable and ordered them to reimburse part of their fees.
In a ruling on 15 February, the court upheld judgments of a first instance court and the Court of Appeal of Madrid holding Spanish arbitrators Luis Jacinto Ramallo Garcia and Miguel Temboury Redondo liable for the set aside of the award and ordering them to reimburse Puma €750,000 in fees each plus interest and costs.
The court said the pair – both high profile political figures in Spain – had "palpably violated the arbitration rules" by excluding the third arbitrator in the case from deliberations, leading to the set aside of the award and the need for a second arbitration.
It also found that, contrary to their view, the third arbitrator had not showed bias or sought to obstruct the arbitration, making his exclusion from the case at the least grossly negligent.
The pair were found liable pursuant to article 21.1 of the Spanish Arbitration Act, which says that arbitrators must "faithfully discharge their functions" or they will be "liable for damages caused in bad faith, wilful disregard or fraud."
While other national arbitration laws carry similar provisions, GAR understands that findings of liability against arbitrators and orders that they pay damages are extremely rare around the world.
Seven years of rulings
The case started as a claim by Spanish distributor Estudio 2000 seeking €250 million from Puma for non-renewal of a distribution contract. In 2010, the tribunal chaired by Ramallo ordered Puma to pay compensation of €98 million in an ad hoc arbitration seated in Madrid.
In 2011, Puma – now represented by the Madrid law firm of Spanish arbitrator Bernardo Cremades and by Andrea Pinna of Paris law firm De Gaulle Fleurance and Associés – sought and obtained the annulment of the arbitral award in the Madrid Court of Appeal.
The sportswear brand argued that Ramallo as chair of the tribunal and Temboury as the distributor's appointee had "stonewalled" Puma's appointee to the tribunal, Santiago Gastón de Iriate y Medrana – telling him that deliberations would be resumed on his return from a trip abroad but instead signing the award in his absence and issuing it to the parties.
The Madrid court agreed and set aside the award for violation of the principle of collegiality of the arbitral tribunal. GAR understands the two other arbitrators were called to give evidence before the court and admitted what they had done.
Following another Madrid-seated ad hoc arbitration initiated by Estudio 2000 – in which Puma reduced the awarded damages by more than 60%, to €42 million – the sportswear brand began its professional liability action.
The first instance judgment was issued in 2013, with a court ruling that the two arbitrators had committed a manifest, serious and inexcusable error covered by the liability provision of the Spanish Arbitration Act. The court said the arbitrators owed Puma damages for their losses, at least the reimbursement of the €750,000 fee paid to each by the brand (out of a total fee of €1.5 million each).
Following an appeal by the two arbitrators – represented by Uria Menéndez and Baker McKenzie – the Court of Appeal of Madrid reached a similar verdict in 2014. The latest decision comes after the arbitrators appealed again.
In both the Court of Appeal and Supreme Court, the arbitrators were ordered to pay the procedural costs of their appeals.
Reining in a runaway tribunal or a step too far?
The case has divided opinion, with counsel for Puma suggesting that the ruling of liability was justified, while another commentator fears it could have a negative effect on Spain as a seat of arbitration because of arbitrators' fears about accepting appointments there.
Cremades says the Supreme Court issued "a landmark decision, which in my opinion is correct and necessary and based on careful consideration of the underlying facts."
"Arbitrators cannot be held liable for the use of their adjudication powers," he says. "However, they have a contractual duty towards the parties and in the event that they recklessly violate these obligations, which the Supreme Court unanimously found in this case, they must compensate them".
"I do not believe that this decision entails any risk for arbitrators in Spain but it is a timely wake-up call that will lead to the correct exercise of arbitral duties."
Pinna says: “The first arbitral award was set aside because it was not a majority award – two arbitrators against one – but the unanimous award of only two of the three appointed arbitrators. This is an infringement of the basic principle of collegiality.”
He thinks that the Supreme Court ruling shows that Spain is “a proper seat for arbitration, the courts of which have the experience and tools to properly sanction improper behaviour.”
Pinna also notes that few legal systems worldwide offer complete immunity for arbitrators, even though this is often called for. "Despite the non-liability clause that you often see in the terms of appointment of arbitrators, many countries’ arbitration laws allow for arbitrators to be held liable in exceptional cases of gross negligence and wilful disregard of basic rule of procedure. This is exactly what happened in this case”.
However, Anibal Sabater, a Spanish national and partner at Chaffetz Lindsey in New York who wrote about the 2011 set-aside decision for the Paris Journal of International Arbitration, says the ruling is a "potentially tragic development," which could leave arbitrators unsure whether to take appointments in Spain.
"Regrettably, the Supreme Court, like the lower courts, trod extremely lightly when it came to factual analysis," Sabater says. "For a case as critical as this, which is unavoidably going to put Spain under the microscope of the arbitration community, I would have expected much more detailed analysis of what went on."
"Holding a deliberation session without a co-arbitrator is obviously an extraordinary measure but it is not necessarily illegal and sometimes may even be justified," he continues. "On the basis of the Supreme Court's extremely succinct account of the facts, it is hard to tell whether the court rightly reined-in a runaway tribunal or went too far."
"Unsettling consequences" of the decision may be that courts feel they have greater power to second-guess what went on in arbitral deliberations; dissenting arbitrators feel they can disclose details of normally confidential deliberations to enable challenges; and the doors are opened for unsuccessful parties to sue not just arbitrators but institutions for alleged breaches of the obligation to ensure a "collegial" decision, Sabater says.
Whether the case was decided wrongly or rightly, he thinks that arbitrators in Spain will be left feeling nervous, just as they are in other jurisdictions that have showed a propensity to make arbitrators financially or criminally liable for their conduct as arbitrators, such as the United Arab Emirates.
Sabater adds that "the gods of arbitration don't seem to be looking kindly upon Spain lately", noting a series of questionable award annulments in other cases. He thinks this particular case could end up before the European Court of Human Rights in Strasbourg, if the impugned arbitrators consider that they were denied due process or that the Spanish courts issued poorly reasoned judgments.
Counsel to the arbitrators who were found liable have yet to respond to requests for comment. At the time of the arbitration, Temboury was president of the Madrid Court of Arbitration, going on to become under-secretary of state for economic affairs in the administration of Prime Minister Mariano Rajoy until last year.
Ramallo is also well known in Spain as a former chair of the CMNV, the Spanish equivalent of the Securities Exchange Commission, from 1996 to 2001.
In the liability proceedings before the first instance court, Court of Appeal and Supreme Court
Counsel to Puma
De Gaulle Fleurance & Associés
Partner Andrea Pinna
B Cremades y Asociados
Partners Bernardo Cremades, Angel Tejada and Javier Juliani and associate Rodrigo Cortés Calvo in Madrid
De Gaulle Fleurance & Associés
Partner Andrea Pinna in Paris
[At first instance, there was a hearing, with Tejada appearing as advocate. Subsequent appeals were decided on the basis of written submissions alone]
[Pinna advised on the case as counsel to the French group Kering, formerly PPR, which is a parent company Puma and as counsel to Puma in the second arbitration]
Counsel to Luis Jacinto Ramallo Garcia (arbitrator)
Baker McKenzie
Partner José Maria Alonso in Madrid
Counsel to Miguel Temboury Redondo (arbitrator)
Uria Menéndez
Partner Jesús Remón in Madrid
In the set aside proceeding
Counsel to Puma
B Cremades y Asociados
Partners Bernardo Cremades, Angel Tejada and Javier Juliani and associate Rodrigo Cortés Calvo in Madrid
De Gaulle Fleurance & Associés
Partner Andrea Pinna in Paris
Counsel to Estudio 2000
Araoz & Rueda
Partners Alejandro Fernández de Araoz and Cristina Ayala in Madrid
In the original arbitration
Tribunal
Luis Jacinto Ramallo Garcia (chair) (Spain)
Santiago Gastón de Iriate y Medrano (Spain)
Miguel Temboury Redondo (Spain)
Counsel to Estudio 2000
Araoz & Rueda
Partners Alejandro Fernández de Araoz and Cristina Ayala in Madrid
Counsel to Puma
SPF Legal
Partner Salvador Ferrandois
In the second arbitration
Tribunal
Alberto Bercovitz (chair) (Spain)
Juan Sánchez-Calero (Spain)
Rafael Illescas Ortiz (Spain)
Counsel to Estudio 2000
Araoz & Rueda
Partners Alejandro Fernández de Araoz and Cristina Ayala in Madrid
Counsel to Puma
B Cremades y Asociados
Partners Bernardo Cremades, Angel Tejada and Javier Juliani and associate Rodrigo Cortés Calvo in Madrid
De Gaulle Fleurance & Associés
Partner Andrea Pinna in Paris