Extent of the kompetenz-kompetenz principle and judicial control of arbitration clauses

@thefromthetree

Lo que sigue es un resumen en inglés de la Sentencia del Tribunal Supremo de 27 de junio de 2017. En español, aquí.

The parties to the lawsuit (a company and a bank) entered into a Spanish Banking Association Master Agreement for Financial Transactions (known as a CMOF), the standard terms and conditions of which included a clause for submission to arbitration. The company started legal proceedings seeking to invalidate certain swap and put contracts signed under the CMOF. The bank applied to the court for an order declaring that it has no jurisdiction due to the submission to arbitration. This application was rejected in the first instance and on appeal.

The bank lodged an appeal with the Spanish Supreme Court for breach of process, under article 22.1 of the Spanish Arbitration Act (Ley de Arbitraje). It argued that (i) once application is made for the court to decline jurisdiction due to the submission to arbitration, the judge can only make a prima facie judgment on the arbitration clause, as it is the arbitrators who have to decide whether they have jurisdiction (the kompetenz-kompetenz principle), and (ii) the submission to arbitration clause has been misinterpreted, by considering that the invalidity of the swap and put contracts was not subject to arbitration.

Regarding the first point, the Spanish Supreme Court cautions that there are two theories on the extent of the kompetenz-kompetenz principle: (a) a “strong theory” (maintained by the bank), according to which judges must limit themselves to a superficial analysis of the arbitration clause and, if there is such a clause, the challenge against the court’s jurisdiction must be upheld so that it is the arbitrators who decide on their own jurisdiction; and (b) a “weak theory” according to which judges must make a complete examination of the validity, effectiveness and applicability of the arbitration clause, and if they consider that it is not valid, they will reject the challenge against the court’s jurisdiction and continue hearing the case.

The Supreme Court takes the second view:

“This court considers that there are no reasons to support the strong theory of the kompetenz-kompetenz principle in our legal system and to limit the judge’s scope of judgment when resolving on challenges against the court’s jurisdiction due to submission to arbitration.”

It bases this on the fact that where the Spanish Arbitration Act intended to limit the scope of the judge’s intervention in judgment of the arbitration clause, it does so explicitly, and that this interpretation is necessarily deferred to in the international legal statues on arbitration and in the form of article 22 of the Arbitration Act in which it through the Spanish parliament.

It should be clarified, however, that the above is compatible with the fact that if an arbitration procedure has started, even if it is at the preliminary stage of formal arbitration, the arbitrators, under article 22 of the Arbitration Act, are competent to rule on their own jurisdiction and their decision in this respect can only be reviewed through actions to have the arbitral award annulled.

Regarding interpretation of the arbitration clause, the Supreme Court recalls that to be effective,

“the unequivocal wish of the parties to submit all or certain issues arising or that could arise from certain legal relations to the decision of one or more arbitrators must be stated”.

Of particular importance here is the fact that the arbitration clause is included in an accession contract. Under article 9.2 of the Spanish Arbitration Act,

“if the arbitration clause is contained in an accession contract, the validity of that agreement and its interpretation will be subject to the rules applicable to these kinds of agreements”.

Given that in this case the arbitration clause was included in an accession contract pre-formulated by the bank, the contra proferentem principle contained in article 1288 of the Spanish Civil Code and article 6.2 of the Spanish General Terms and Conditions of Contracting Act (Ley de Condiciones Generales de la Contratación) must apply;  the arbitration clause cannot be interpreted in such a way as to extend the arbitrators’ jurisdiction to matters that are not specifically and unequivocally stated as open to arbitration in the arbitration clause.

The arbitration clause contained in the CMOF stated:

“All disputes or conflicts arising from this Master Agreement, its interpretation, performance and enforcement, will be ultimately subject to Arbitration in Equity”.

The Supreme Court states that the clause was interpreted correctly by considering that the invalidity of the swap and put contracts were outside the scope of the submission to arbitration. Accordingly, the court rejects the appeal for breach of process.