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ENFORCEABILITY OF ARBITRAL AWARDS
I. A case of unenforceability of an award Article 45.1 of Law 60/2003, of 23 December, on Arbitration (“LA”) provides that “An award is enforceable even if an action has been brought to set it aside”. However, case law has established a number of requirements with regard to the enforcing of arbitral awards which are not final and binding. Moreover, Article 44 of the LA establishes that the enforceability of awards will take place in accordance with the Spanish Civil Procedure Law (“LEC”) and will therefore be subject to the rules and requirements of civil procedure.
In a decision rendered by the Madrid Court of First Instance no. 74, within the framework of the enforcement proceedings of an arbitral award, the Court declared the award unenforceable. The case dealt with the distribution of inheritance between five heirs. The inheritance assets were mainly shares in companies which the heirs already controlled. Due to certain disputes between the heirs, they decided to divide the inheritance up by allocating the shares amongst themselves and thus entered into an arbitral agreement to resolve the situation. However, the final decision included in the award was vague and inaccurate: neither the assets nor the company shares were well identified and their value was not clear.
The parties' claims pursued the division of the inheritance in order to distribute the assets between the heirs. However, the award only ruled on the transfer of the company shares, and made no mention of the title of the holder or of the shares' value. The parties requested clarification of the award, but the decision did not clear up the matter.
An action to set aside the award was initiated and then dismissed by the Madrid Court of Appeals. However, within the framework of the enforcement proceedings, the award was declared unenforceable as it did not accurately identify the different aspects of the division of the inheritance. The Madrid Court of First Instance no. 74 accepted the motion opposing the enforcement of the award and issued a ruling declaring the award unenforceable. This ruling was confirmed by the Madrid Court of Appeals on 20 February 2006. The Court of Appeals stated that:
"in accordance with the terms of the award it is not possible to divide the inheritance and therefore the award cannot be enforced. [...] the purpose of the annulment proceedings is to avoid every possible effect of the award or to consider it as nonexistent, whereas the opposition to the enforcement only affects the enforcement proceeding without any impact on the validity of the award. Validity and effectiveness of the award is a different thing from its enforceability. The reason why in this case the award is not enforceable is not related to the fact that this award has the effect of res iudicata, thus it will be necessary to take it into account in future proceedings".
A court judgment may contain three types of pronouncements or reliefs: declaratory relief, constitutive relief or sentencing pronouncement. By means of a declaratory pronouncement the court declares the existence of a given situation (e.g. the jurisdiction of a court). A constitutive pronouncement creates a situation (e.g. the termination of a contractual relationship). On the other hand, a sentencing pronouncement orders someone to do something (e.g. to pay another person a given amount of money).
The ruling of the Court of First Instance no. 74 considered that the award only included declaratory relief but not condemnatory relief. According to Article 521 of the Civil Procedure Law, declarative and constitutive relief are unenforceable, only the obligation to pay or perform duties are subject to Court enforcement. Article 559.1.3 of the Civil Procedure Law also states that an award that does not include any condemnatory relief is unenforceable. Taking into consideration these provisions, it would therefore appear that, in this case the award was not enforceable.
The award included declaratory relief regarding the inheritance and acknowledged that the parties should comply with certain obligations in the future. Thus, in this case, to obtain condemnatory relief and therefore a successful Court enforcement, it would have been necessary to accurately determine the specific amounts and assets to be distributed between the heirs.
II. Enforcement of Court judgments ordering a party to issue a declaration of assent
Article 708 of the Civil Procedure Law regulates how to enforce the relief in cases in which a Court orders a party to issue a declaration of assent. These situations are especially relevant under Spanish Law to the extent that certain contracts must be granted before a notary public in order to have full effect. This is the case in the transfer of real estate and corporate participations of limited liability companies. This issue was dealt with by the Barcelona Court of Appeals in a decision dated 2 June, 2008 in which the stakeholders of a limited liability company decided not to vote for a resolution to reduce company capital despite having previously agreed to it. The Arbitral Tribunal ordered the defendant to issue the appropriate declaration of assent in order to grant a public deed for reduction in capital and thus to amend the company stake.
Three different issues were presented before the Barcelona Court of Appeals in relation to Article 708 of the Civil Procedure Law. First, the agreement to reduce capital had been signed by the stakeholders, therefore it was the company that was affected, but it was not a party to the proceedings. Second, if the losing party did not voluntarily comply with the decision, the Court could only replace the declaration of assent if there were either a contractual framework, or a preliminary contract, or if the relief being sought was the granting of a notarial deed under a previous existing agreement. Third, the votes of the stakeholders are "personal" and a judgement cannot replace personal assent. In accordance with Article 708 of the law, in such cases the Judge can only enforce the Court judgment by assigning a financial value to the order contained therein. Furthermore, the losing party might be considered to be in contempt of Court.
Regarding third party interventions in enforcement proceedings, Article 538.2.3º of the law provides that it is possible to start such a proceeding against a party which is not the debtor under the Court ruling to be enforced, but is the titleholder of the assets directly affected by the compliance of the judgment. However, the Barcelona Court of Appeal's reasoning did not apply that rule, but rather considered that the stakeholder's intention and assent was borne out of the company's intention insofar as their vote originated in the company's decision. This argument takes into account the case law of the Spanish Supreme Court, which, in a decision dated 10 February 1992 stated that the agreement reached in a contractual framework by all shareholders was binding upon the company.
The Barcelona Court of Appeals did not consider that a preliminary contract or a contract to be incorporated in a notarial deed was necessary in order to apply article 708 of the law. The Court considered the award which imposed the reduction of a company's capital should be considered sufficient given that it was rendered in the framework of an arbitral proceeding to which all the stakeholders had been a party and based on an agreement entered into by all of them. Additionally, the award established the essential elements of the declaration of intention.
Finally, the Court of Appeals did not consider the order to issue a declaration of assent of a "personal" nature. The votes of shareholders may be delegated, and thus it cannot be argued that their voting rights are "personal".
The Barcelona Court of Appeals found that the declaration of assent can be replaced by the Court in enforcement proceedings as long as all the essential elements of the obligation are contained in the award, as this is the rationale underlying Article 708. This is of course irrespective of the possibility of enforcing "personal" obligations contained in a judgment by means of assigning a financial value to such an obligation if the party sentenced by the judgment refuses to perform it.
Author: Félix J. Montero, partner at PEREZ-LLORCA.