In a controversial decision, the Spanish Supreme Court has annulled an award on grounds that the tribunal was not properly constituted where an award was made without the presence or signature of the third arbitrator.
This controversial decision arose out of an ad hoc arbitration seated in Spain under the UNCITRAL arbitration rules between the claimant Spanish company Estudio 2000 S.A. (Estudio 2000) and respondent Puma AG Rudolf Dassler Sport (Puma).
The arbitral award in question was issued on 2 June 2010, ordering Puma to indemnify Estudio 2000 for the unilateral termination of a supply contract executed between the parties. However, the award was issued without the presence and consent of the third arbitrator, nominated by Puma. The third arbitrator was in fact traveling at the time, which the other two members of the tribunal knew.
As a result, Puma sought annulment of the award before Spanish Courts, alleging that the award violated public policy and ignored the Principle of Collegiality (one of the key principles of arbitration established in article 41 section 1 subsection f) of the Spanish Arbitration Law).
The Spanish Supreme Court annulled the award on alternative grounds, namely that the arbitral tribunal had not been properly constituted at the time the award was rendered. Surprisingly, the Spanish Supreme Court also ordered the two tribunal members to reimburse the fees paid to them by Estudio 2000 for issuing the award.
Professional liability action
Once the award was annulled, Puma commenced a professional liability action against the two arbitrators who rendered the award. Article 21 of the Spanish Arbitration Law establishes that arbitrators that do not faithfully discharge their functions, can be considered professionally liable for their conduct, if their actions were carried out with willful misconduct, bad faith or recklessness. The First instance Court and subsequently the Supreme Court found the arbitrators to be reckless and were ordered to each pay Puma € 750,000 plus interest and costs.
The Spanish Supreme Court found that the core of the dispute did not relate to the fact that the award was rendered without the presence of the arbitrator or the fact that there was not a unanimous decision among the arbitrators. In fact, Article 35 of the Spanish Arbitration Law establishes that if the arbitrators cannot reach a unanimous decision, the President of the tribunal will take the final decision.
As the arbitrator designated by Puma did not hinder the process in any way, nor did he prevent the arbitrators from reaching a decision (the deadline for the arbitrators to issue the award had not yet passed) the arbitrators had no justification to issue an award without the third arbitrator having an opportunity to take part in the process.
On the one hand this case could be seen as damaging for Spain's reputation in international arbitration. The arbitrators' conduct is clearly not of the expected standard and the Spanish courts have not been quick to deal with the matter (the First Instance decision being in 2013). However, the fact that the Supreme Court has made this robust ruling shows that the Spanish Courts will step in to support arbitration and sanction as needed.
The case may also impact arbitrators' desire to be appointed in arbitrations seated in Spain if they could be found liable for their actions. This must however be considered in the context that complete immunity to suit is generally unavailable in most jurisdictions and, while findings of liability against arbitrators are rare, it is likely that the circumstances of this case, which were particularly extreme, would also lead to liability in jurisdictions other than Spain.