In a recent decision, the Court of Appeal of Madrid set aside a partial award on jurisdiction, holding that the arbitral tribunal had wrongly accepted jurisdiction since the dispute submitted to arbitration was beyond the scope of the arbitration clause.

The parties had entered into a construction contract which contained the following clause:

Problems arose during the performance of the contract and the owner commenced court proceedings against the contractor. Shortly after, the contractor requested the commencement of arbitration proceedings requesting a declaration that the contract had been properly cancelled due to the owner's breach, a declaration of a debt of the owner to the contractor and an order for the contractor to pay this amount. Both parties raised objections to jurisdiction at the proceedings which they had not initiated.

The arbitral tribunal appointed issued a partial award declaring its competence to decide the dispute. The owner then initiated proceedings to set aside the partial award, on the grounds that the arbitration agreement did not encompass the specific claims submitted by the contractor.

The Court of Appeal carried out an analysis of the arbitration agreement, applying the Spanish contract law principle that the literal meaning prevails, unless it is proved that the wording is contrary to the evident intention of the parties.

Following this principle, the Court of Appeal concluded that the parties had only consented to arbitration of disputes exclusively related to the interpretation of the contract, leaving other disputes related to the development, execution or performance of the contract outside the scope of the arbitration clause.

The court then considered whether such a restricted and specific interpretation would make any sense for the parties. The court took the view that the restrictive scope of the clause made commercial sense: this clause was intended to apply to disputes of interpretation which might arise during the performance of the contract. Such disputes could be solved rapidly in negotiation or arbitration in order to avoid interference with the performance of the contract. The court concluded that the logic behind this arbitration agreement was the speed of arbitration in comparison with judicial proceedings. In so deciding, the court highlighted that disputes relating to the interpretation of the contract may often arise independently of, for example, damages claims. The Court of Appeal concluded that there was no valid arbitration agreement to decide the dispute submitted to arbitration and set aside the partial award.

The Court of Appeal included an additional statement to clarify that the setting aside of a partial award declaring jurisdiction does not infringe the kompetenz-kompetenz principle, pursuant to which the arbitrators have the exclusive competence to decide on their own jurisdiction during the arbitration proceeding (without prejudice to the court's ability to set aside that decision on jurisdictional grounds).

Even though the Madrid Court of Appeal apparently did not apply prior precedent, there is a previous Supreme Court ruling (Judgment of the Supreme Court 844/2006, of 5 September 2006), supporting the thesis that when an arbitral clause applies only to the "interpretation of the contract", this does not confer upon arbitrators the power to decide on a case related to the breach of a contract and its consequences. The Supreme Court took into consideration that the contract and the facts were clear, so there was no need for interpretation to decide the case.

However, other courts in Spain have ruled against such interpretation. For example, the Court of Appeal of Barcelona (Judgment of the Court of Appeal of Barcelona (14th Section) of 8 November 2002) ruled that an agreement submitting to arbitration "...any doubt or discrepancy that may arise in the interpretation..." of a contract should be interpreted flexibly, and concluded that the parties submitted to arbitration any discrepancy related to the contract and that the use of the word interpretation did not intend to limit the scope of submission, as it is necessary to interpret a legal or contract provision in order to apply it. Other Spanish decisions, although dealing with less restrictive drafting, have supported a flexible interpretation of the arbitration agreement.

The limited effectiveness of the arbitration clause: Following the Court of Appeal's interpretation of the arbitration agreement it would be arguable that every interpretative discrepancy, even if it arose in the context of a damages claim in court, would have to be first submitted to arbitration. A party might find itself forced to initiate arbitration proceedings to ascertain the meaning of a provision, to then enforce it through judicial proceedings. Otherwise, the wording of the arbitration agreement (which constituted the basis of the Court of Appeal's judgment) would not be respected.

To some extent, any case involving the application of a contract requires its interpretation; only cases where the parties argue solely on the facts would be able to avoid a preliminary arbitral phase. Even then, a party might easily force the intervention of an arbitrator by artificially raising disagreements on the interpretation of the contract.

Is this "two-step" mechanism a reasonable solution for almost every dispute under this clause? Can this be considered consistent with the implicit cost-saving intention of the parties (referred to by the Court of Appeal)? In summary, can one reasonably expect that such a complex dispute resolution mechanism was intended by two businessmen when they used the word interpretation in their contract?

A very similar situation was resolved by the Court of Appeal of England and Wales (and later confirmed by the House of Lords) in Fiona Trust & Holding Corpn v Privalov, [2007] EWCA Civ 20. In that case, one of the questions at issue was whether the parties intended different scopes when in two different sections of a contract submitted to arbitration their disputes "under" the contract and "out of" the contract. One of the parties alleged that the former wording excluded the existence or validity of the contract, while the latter included all disputes. The Court of Appeal supported its ruling on the presumption in favour of a one-stop dispute resolution mechanism: