Socialtech, S.r.l. v. Izo Corporate, S.L.

At a glance

Parties

Socialtech, S.r.l. (applicant for annulment; respondent in the arbitration) v. Izo Corporate, S.L. (claimant in the arbitration)

Case no.

Annulment proceeding No. 45/2018; Judgment No. 49/2018 (STSJ M 12822/2018); Order ATSJ M 158/2019

Court

Tribunal Superior de Justicia de Madrid, Civil and Criminal Chamber, Section 1

Underlying award(s)

Final Award of 14 April 2018, ICC Case No. 22917/JPA (sole arbitrator)

Forum and rules

Action to annul an award under the Spanish Arbitration Act (Ley 60/2003), Article 41.1(f) and 41.2; underlying ICC arbitration

Treaty

None. Franchise contract of 12 December 2013, governed by Spanish law (clause 22.1)

Court

Judgment: Francisco Javier Vieira Morante (President, dissenting), Francisco José Goyena Salgado, Jesús María Santos Vijande (rapporteur). Order of 5 March 2019: Juan Pedro Quintana Carretero (President), Francisco José Goyena Salgado, Jesús María Santos Vijande (rapporteur)

Sector

Franchising; competition law

Outcome

The Court refused the parties' joint request to end the case, annulled points 3, 4 and 5 of the award's operative part (the non-compete penalty and the costs awards) on public policy grounds, and later dismissed Izo's application to set aside its judgment.

Amount

The award ordered Socialtech to pay EUR 98,969.53 for unpaid invoices (not challenged), EUR 120,000 as a penalty for breach of the post-contractual non-compete covenant (annulled), USD 20,000 of the arbitration costs, and EUR 20,000 plus VAT in legal fees with further expenses (annulled). Izo was ordered to pay the costs of the annulment proceeding and of the nullity application.

The dispute

Izo Corporate, S.L., the franchisor, and Socialtech, S.r.l., the franchisee, signed a franchise contract on 12 December 2013. The contract covered Argentina and Uruguay and was governed by Spanish law. After Izo ended the contract, it brought an ICC arbitration (No. 22917/JPA). In the Final Award of 14 April 2018 the sole arbitrator ordered Socialtech to pay unpaid invoices and a EUR 120,000 penalty for breaching the one-year post-contractual non-compete covenant (clause 15.2). The arbitrator held that EU competition law, including Article 101 TFEU and Commission Regulation (EU) 330/2010, did not apply because the covenant covered territory outside the EU internal market. Socialtech asked the Madrid High Court to annul the award in part as contrary to public policy (Article 41.1(f) of the Arbitration Act), arguing that the arbitrator had failed to apply mandatory competition rules that form part of Spanish law. Izo replied that EU rules cannot apply to a covenant limited to Argentina and Uruguay, and that Socialtech had never shown any effect on competition.

Key holdings

1. The parties' joint withdrawal, filed after the evidence stage and the day before deliberation, was refused. Once an annulment action raises public policy, the award's validity is no longer at the parties' disposal. The Court has a duty under Article 41.2 of the Arbitration Act to examine of its own motion grounds such as public policy. Judgment 49/2018, FJ 1 bis
2. Public policy includes 'economic public order', and competition rules are mandatory norms that arbitrators must apply. Through Article 1.4 of the Spanish Competition Act (Ley 15/2007), Spanish law incorporates the EU block exemption regulations even where trade between Member States is not affected. Judgment 49/2018, FJ 2
3. The award's reasoning was arbitrary or merely apparent. The arbitrator wrongly held EU competition law inapplicable. He did not examine whether the covenant met Article 5.3(b) of Regulation 330/2010 or, if not, whether it was a conduct of minor importance under Article 5 of the Competition Act and Royal Decree 261/2008. This breached the right to effective judicial protection (Article 24.1 of the Constitution) and public policy, so point XI.3 (the EUR 120,000 penalty) was annulled. The Court did not decide whether the covenant is valid. Judgment 49/2018, FJ 2, Decisión de la Sala
4. The arbitrator had awarded Izo its costs on the 'substantial success' doctrine. Once the penalty was annulled, that reasoning lost its basis, so points XI.4 and XI.5 (arbitration costs and legal fees) were also annulled. The Court held that this did not go beyond what Socialtech had asked for. Socialtech's own costs remain with it (point 7). Judgment 49/2018, FJ 3
5. President Vieira Morante dissented. In his view the parties' joint withdrawal should have been accepted and the case closed without costs, because no public or private interest was affected. Judgment 49/2018, dissenting opinion
6. Izo's application to set the judgment aside for breach of fundamental rights was dismissed unanimously. The judgment had not gone beyond the claim, since the ground pleaded was public policy. Refusing the withdrawal applied settled case law consistently, so there was no breach of equality. A costs order cannot be set by agreement of the parties. Izo was ordered to pay the costs of the application, and no appeal lies. Order of 5 March 2019, FJ 2–7

Procedural history

1. 12 December 2013Izo and Socialtech sign the franchise contract.
2. 30 June 2017Izo files its Request for Arbitration with the ICC.
3. 14 April 2018The sole arbitrator issues the Final Award in ICC Case No. 22917/JPA.
4. 22 June 2018Socialtech files its action to annul the award in part. The action is admitted on 19 July 2018, and Izo answers on 19 September 2018.
5. 10 December 2018Both parties file identical submissions: Socialtech withdraws, Izo consents, and they ask that the case be closed without costs.
6. 13 December 2018Judgment No. 49/2018 refuses the withdrawal and annuls points 3, 4 and 5 of the award, with a dissent by the President.
7. 28 January 2019Izo applies to have the judgment set aside for breach of fundamental rights.
8. 5 March 2019The Court's order dismisses Izo's application, with costs against Izo.

Tribunal, counsel and experts

Decided by

• Francisco Javier Vieira Morante Judge, Tribunal Superior de Justicia de Madrid (President for Judgment 49/2018; dissented)
• Francisco José Goyena Salgado Judge, Tribunal Superior de Justicia de Madrid
• Jesús María Santos Vijande Judge, Tribunal Superior de Justicia de Madrid (Rapporteur)
• Juan Pedro Quintana Carretero Judge, Tribunal Superior de Justicia de Madrid (President for the Order of 5 March 2019)

For the claimant

María del Valle Gili Ruiz

For the respondent

José Noguera Chaparro

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Keywords

• set-aside
• annulment of award
• public policy
• economic public order
• franchise agreement
• post-contractual non-compete
• Article 101 TFUE
• Regulation (EU) 330/2010
• vertical restraints
• Spanish Competition Act
• de minimis
• withdrawal of annulment action
• Article 41.2 Arbitration Act
• duty to state reasons
• costs of arbitration
• ICC
• Argentina
• New York Convention Article V(2)(b)

Summary generated with AI from the published documents — refer to the award for the authoritative text.