This Kitten Has Claws: PUMA Prevails as Spanish Supreme Court Orders Clawback of €1.5 Million in Fees from Arbitrators Who Violated the Principle of “Arbitral Collegiality”
In Judgment No. 102/2017, the Civil Chamber of the Spanish Supreme Court (Tribunal Supremo) (the "Supreme Court") dismissed an appeal of two high profile arbitrators (the “Arbitrators”) ordering them to return to German athletic apparel multinational PUMA SE (“Puma”) all fees, plus interest and costs, received from Puma during an ad hoc arbitration seated in Madrid in 2010.
The Supreme Court held that the Arbitrators violated the principle of “arbitral collegiality” and were in contravention of Article 21 of the Spanish Arbitration Law (Ley 60/2003 de 23 de diciembre, de Arbitraje), which requires arbitrators to “comply faithfully with their responsibilities”, when they excluded the third arbitrator on the panel (“Puma’s Appointee”) from formal deliberations and issued an arbitral award without his knowledge or consent.
On August 6, 2009, Estudio 2000, S.A. (“Estudio”), a former Spanish distributor of Puma apparel, initiated an ad hoc arbitration against a Puma subsidiary. Estudio sought €250 million in damages following Puma’s refusal to renew a distribution contract.
A conflict arose after the hearing at a panel deliberation on May 31, 2010 when, in addressing quantum, the Arbitrators and Puma’s Appointee disagreed on the amount of compensation Estudio should be entitled to. Further panel discussions were then put on hold as Puma’s Appointee had scheduled travel for the beginning of June.
Aware that Puma’s Appointee was travelling, the Arbitrators reconvened deliberations without him and issued a formal arbitral award on June 2, 2010, without his knowledge or consent. Puma’s Appointee was notified of the Arbitrators’ decision on that same day at 9:11 pm Spanish time, by email.
The arbitrating parties did not request an expedited decision and, under the rules in place, the arbitral award did not have to be issued until July 4, 2010, over a month later.
On June 10, 2011, Puma obtained an annulment of the arbitral award before the Twenty-Eighth Judicial District of the Provincial Court of Appeal of Madrid (la Sección 28 de la Audiencia Provincial de Madrid).
In a subsequent arbitration that followed, the initial €98 million award against Puma was reduced to €42 million and Puma commenced a civil liability claim against the Arbitrators shortly thereafter.
On September 20, 2013, the Court of First Instance No. 43 of Madrid (el Juzgado de Primera Instancia No. 43 de Madrid) determined that each of the Arbitrators was liable to pay Puma €750,000 (Puma’s entire portion of the fees paid to the Arbitrators during the arbitration) plus interest and costs.
On October 27, 2014, the Eighth Judicial District of the Provincial Court of Appeal of Madrid (la Sección 8 de la Audiencia Provincial de Madrid) dismissed the Arbitrators’ appeal, setting the stage for a further appeal by the Arbitrators to the Spanish Supreme Court.
In addition to €1,500,000 plus interest and costs, personal reputations were at stake. The panel chair in the initial arbitration was a former Vice President of the Comisión Nacional del Mercado de Valores (the Spanish Securities and Exchange Commission) and Estudio’s appointee at the initial arbitration was the sitting president of the Madrid Court of Arbitration at that time.
In upholding the decision of the Eighth Judicial District of the Provincial Court of Appeal of Madrid, the Supreme Court determined that the actions of the Arbitrators amounted to a violation of the principle of arbitral collegiality and, additionally, a breach of arbitrator duty under Article 21 of the Spanish Arbitration Law.
Article 21.1 of the Spanish Arbitration Law, which is based on the UNCITRAL Model Law on International Commercial Arbitration, provides:
. . . acceptance obliges the arbitrators and, where appropriate, the arbitral institution to comply faithfully with their responsibilities, being, if they do not do so, liable for damage and losses caused by bad faith, recklessness or willful misconduct. In arbitrations entrusted to an arbitral institution, the injured party may take direct action against said institution, regardless of the remedies that such institution may seek against the arbitrators. [Emphasis added]
The arbitral award issued by the Arbitrators included the following provision:
This award is signed, in accordance with the provisions of article 37.3 of the Spanish Arbitration Law, by [the Arbitrators], both constituting the majority of the members of the Arbitration Board required by the above mentioned article. There is no evidence of [the Puma Appointee’s] signature since he still has not expressed his consent to this award. It is considered, however, that the notification to the parties should be carried out as soon as possible in accordance with the interest expressed by such parties in such regard during this arbitration.
The Court held that while it is theoretically possible that two or more arbitrators may, depending on the circumstances, exclude others when discussing certain aspects of an arbitration; the conduct the Arbitrators engaged in when they determined and issued the arbitral award without the participation, consent, or knowledge of Puma’s Appointee was unacceptable:
. . . what is not acceptable is that those who have breached the arbitration rules in such a palpable way, resort to them later by employing an interpretation that, if admitted, would invalidate the very essence of what constitutes the deliberation and decision of all the members of an arbitration tribunal or jurisdictional body and which is inherent to the principle of collegiality and contradiction among all of them through the process of deliberation and responsible making of . . . adopted decisions when more than one arbitrator acts . . .
The Supreme Court found it significant that there was no objective need for the Arbitrators to act as they did, considering that an arbitral award was not required (and the parties had no expectation of receiving one) until over a month after it was hastily issued on June 2, 2010. The Supreme Court also viewed as important, the fact that Puma’s Appointee had not unilaterally attempted to obstruct, prejudice, or otherwise negatively affect the proceedings or outcome in any way.
Finally, the Court clarified that under Spanish law, arbitrators can only be liable in cases where they act with the intent to cause harm or are grossly negligent, engaging in conduct which is “unusual or unexpected that is outside the scope of anyone’s good judgment”.
While the Supreme Court’s decision may sound alarm bells for arbitrators and, in particular, those presiding over or contemplating arbitral mandates in Spain that fall under Spanish law, it must be remembered that very few jurisdictions offer complete immunity to arbitrators to begin with (outside of what the arbitrating parties have contractually agreed to in retaining the arbitrators involved).
Perhaps more importantly, this decision can be readily distinguished from cases where a majority award, opposed by one strongly dissenting panel member, is challenged as having been arrived at unfairly.
This was not simply a case of two panel members disagreeing with or pressuring a third but, rather, two members completely ignoring the views of the third member (whom the Court found did nothing wrong) and, more seriously, issuing an arbitral award in his absence without his participation, consent, or knowledge after it appeared (at least subjectively) that they would wait for his return.
Whether such actions would be considered a violation of the principle of arbitral collegiality and breach of arbitrator duty in other jurisdictions remains an open question but one thing is hopefully more clear: findings of civil liability against arbitrators resulting in damages, much like the actions of the Arbitrators in the initial Puma arbitration, are and will likely continue to be, exceedingly rare.
arbitral collegiality arbitral tribunals arbitrator immunity PUMA SE Spanish Supreme Court