First Spanish court ruling upholding validity of hybrid dispute resolution clause

Judgment of the Provincial Court of Madrid, 28th Chamber, Auto 147/2013 The Provincial Court of Madrid has upheld a hybrid dispute resolution clause which gave both parties the option of referring a dispute to either international arbitration under the Arbitration Rules of the Netherlands Arbitration Institute (NAI) or the courts of "S-Hertogenbosch (in the Netherlands).

This is the first judgment in Spain that clearly recognises the validity of hybrid or optional dispute resolution clauses, which are becoming more and more popular in financial products.

Optional dispute resolution clauses

Optional dispute resolution clauses allow the parties some flexibility about where to bring a claim. Sometimes the clause allows the parties a choice between different courts. In other cases the parties can opt for different dispute resolution methods, such as arbitration or mediation, instead of litigation. These are known as hybrid dispute resolution clauses.

Optional dispute resolution clauses and hybrid clauses can be unilateral or bilateral. If a clause is unilateral, only one of the parties has any choice about where to bring a claim, leaving the other party bound to a particular forum or type of dispute resolution mechanism. If a clause is bilateral, then both parties have choice.

The use of these clauses is widespread in financial products and international finance transactions. Very often the lender has more flexibility about where to sue (often in any court of competent jurisdiction), and additionally in arbitration proceedings, while the borrower is bound to commence proceedings in only one forum.

International context

The validity of these types of clause have been tested in other jurisdictions, such as in England, where they are considered to be valid,¹ while in France and Russia courts have held similar clauses to be invalid.

In 2012, the French Supreme Court reviewed a dispute resolution clause giving one party the possibility of choosing different court jurisdictions (French Cour de Cassation, 1st civil chamber, 26 September 2012, Decision No 983). The Supreme Court held that this clause was void as it entailed obligations conditional on an event that only one party controlled (see the December 2012 European Finance Litigation Review).

In Russia, the Supreme Commercial Court had to review the validity of a dispute resolution clause, whereby both parties in the agreement could use arbitration to solve their disputes, but one of them had as an alternative the choice of bringing a claim before any court with jurisdiction (Supreme Commercial Court, Decision dated 19 June 2012, see the September 2012 European Finance Litigation Review). The Supreme Court considered the principles of equality of arms and procedural rights and held that a clause in those terms breached the balance of rights of the parties. In summary, although it is not expressly stated in the decision, one could conclude by implication, that had the two parties had the same options, the Supreme Court would have accepted the validity of the hybrid clause.

Situation in Spain: the decision of the Madrid Provincial Court

Hybrid jurisdiction clauses pose a problem under Spanish legislation since there was previous case law that held that an arbitration clause must contain a clear and unequivocal will to submit disputes to arbitration. The fact that a clause contained both an arbitration agreement and an option to litigate had, in previous cases, been found to be inconsistent with an unequivocal intention to submit a dispute to arbitration.

However, the Madrid Provincial Court has recently upheld the validity of hybrid clauses. Specifically, it recognised that it is an international practice for parties to combine an arbitration agreement with other dispute resolution procedures as alternatives, such as mediation or litigation, either by allowing one party to choose the method, or by describing the type of disputes that can be submitted for each method.

The court also considered whether anti-trust disputes could be arbitrated, examining the preamble and article 6 of Regulation CE 1/2003, on the implementation of rules on competition. It concluded that nothing in the Regulation prevented anti-trust disputes from being referred to arbitration, and nor were there any public policy grounds preventing this. It noted that the parties to the hybrid clause had not waived the right to have anti-trust law applied to a dispute raising such issues, and that any arbitral tribunal hearing the dispute would be bound to apply anti-trust law. Any failure to do so would be a ground for annulment of the award. This decision confirms previous judgments of the European Court of Justice and the Spanish Supreme Court.

Finally, the court examined the rules of Regulation 44/2001, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, in relation to the parties' agreement to submit a dispute to a particular court, and decided that the option to refer disputes to the "s-Hertogenbosch courts' was valid, and in accordance with EU law.

Effect of this decision

This decision clarifies the legal standing of hybrid clauses under Spanish law. However, it should be noted that in the case decided by the Madrid Provincial Court, the jurisdiction clause was bilateral, ie both parties had the same options. As a consequence, unilateral or "asymmetric" hybrid clauses (those giving just one of the parties the option to file a claim in different forums) have not yet been tested by Spanish Courts. Thus, it is not possible to extrapolate this decision to every optional or hybrid clause, since even the court impliedly pointed out that any assessment has to be done on a case by case basis.

Footnotes

_{1. NB Three Shipping Ltd v Harebell Shipping Ltd [2005] 1 All ER (Comm) 200; Mauritius Commercial Bank Ltd v Hestia Holdings Ltd & anr [2013] EWHC 1328 (Comm).}