After the sale of tens of thousands of arbitration clauses purchased by landlords to collect rents and evict tenants through private arbitration schemes, the day had to come when a landlord called on arbitration to collect and to evict. The arbitration clauses were sold as “rent guarantees”. With such a name, landlords naturally expected to prevail. These so-called “guarantees” were sold at 42 Euros each.
If statistics on the sale of arbitration clauses published in the media is correct (we doubt it, because it cannot be independently ascertained), then two private arbitration services have collected several million Euros from landlords throughout Spain. As it turns out, the “guarantees” guarantee nothing. As we will examine, recent case law forbids using arbitration as an out-of-court method to either collect unpaid rent or to evict tenants.
Let us remind landlords that an arbitration award is not an executive but a declaratory instrument. An award is effective in two ways only: one, when parties abide by and perform the award of the arbitrator and, two, when the prevailing party moves to enforce the award in a court of law. In other words, in landlord/tenant relations, neither can rent be collected, nor can eviction take place unless a judge orders payment and/or eviction. No one but the Judiciary can enforce a judgment, in court or out-of-court. While this may seem obvious, it wasn’t so to many landlords in Spain who thought they were buying a result without much ado.
TITLE VIII
The Enforcement of Awards
Article 44. Applicable Rules
The enforcement of the awards shall be governed by the provisions of the Civil Procedure Act and this Title.
Article 45. Suspension, Dismissal and Continuance of Enforcement in the Case of an Application to Set Aside an Award.
1. An award is enforceable even though an application to set aside has been made. Nevertheless, in that event the party against whom enforcement is sought may apply to the competent court for the suspension of enforcement, provided that he offers security for the amount awarded, plus the damages and losses that might arise from the delay in the enforcement of the award. The security may take any of the forms provided for in paragraph 3(2) of Article 529 of the Civil Procedure Act.12 Once the application for suspension is filed, the court, after hearing the party seeking enforcement, shall fix the security. There is no appeal against this decision.
2. The suspension shall be lifted and the enforcement continue when the court is satisfied that the application to set aside has been disallowed, without prejudice to the right of the party seeking enforcement to demand, if applicable, indemnification for the damages and losses caused by the delay in the enforcement, by means of the procedure set out in Articles 712 and subsequent articles of the Civil Procedure Act.13
3. The enforcement shall be revoked, with the consequences set out in Articles 533 and 534 of the Civil Procedure Act,14 when the court is satisfied that the application to set aside has been allowed.
If the application to set aside relates only to the questions referred to in paragraph 3 of Article 41 and other determinations of the award remain valid, then the application shall be considered successful in part, for the purposes provided for in paragraph 2 of Article 533 of the Civil Procedure Act.
To facilitate the enforcement of awards, the arbitration act in effect in Spain establishes that enforcement be requested at the basic trial level, in the courts of first instance. Thus, decisions do not set jurisprudence. On a similar, or next to identical matter, a judge may find one way, and his colleague two court rooms down the hall may find differently, with no obligation to find or reason otherwise. However, in Madrid, First Instance Judges (trial judges) in courts nº 21 and nº 26 have dealt a deadly blow to landlord/tenant arbitration schemes basing their finding of law on the exact same grounds.
On the motion nº 646/2007 to execute an award before the Court of First Instance of Madrid nº 26 we find the following conclusions of law:
It is clear that to rescind a landlord/tenant agreement on grounds of default by the tenant in payment of rents due the landlord, the finding of default falls exclusively within the Judiciary after a hearing which must mandatorily take place before the Judiciary as established in the Code of Civil Procedure, which excludes arbitration.
Basing itself on article 21 of Spain’s Arbitration Act, the Court finds that landlord/tenant relations may not legally contemplate arbitration as a means to resolve disputes.
In conformity with Article 21 of the arbitration act in effect today, “only matters of free disposition between the parties may be arbitrated”. Statutory law regulating eviction in the Code of Civil Procedure is of an imperative nature prohibiting parties from agreeing to any other kind of eviction procedure, precisely because of the coactive nature of a finding of default in rents payable by the tenant to the landlord, and which inevitably and necessarily entail eviction from the rented property.
The Court continues to find that parties to a landlord/tenant contract cannot agree to arbitration as a matter of law. To support this argument, the court reasons that the Spain’s Code of Civil Procedure 2000 (LAU) , repeals article 39, nº 5 of the Law regulating Landlord/tenant contracts and which allowed arbitration.
The Code of Civil Procedure in effect today repeals article 39, nº 5 of the LAU by establishing that only ordinary courts of law may hear and decide eviction related proceedings.
The Court continues reasoning that “the peculiarities of eviction proceedings find an impossible fit in existing arbitration legislation”.
No matter what other arguments may be advanced, the peculiarities of eviction proceedings find an impossible fit in existing arbitration legislation because the right to bring the payment of rent up-to-date to prevent eviction can only happen when the eviction procedure is filed in a court of law, not in arbitration.
By way of explanation, in Spain the tenant has a single chance to pay overdue rents and thus prevent eviction. Nothing in any law contemplates this right in arbitration, meaning that this right can only be exercised before a court of law in an ordinary eviction lawsuit. In Spain, a second default on rents leading to definitive eviction may not be cured by paying overdue rents unless the landlord agrees to “forgive” the tenant a second time. In other words, the tenant has a single, one-time opportunity to cure the default and prevent eviction. Thus, payment on a first default stops eviction in a court of law and the court is not clear that this statutory right is extended to arbitration proceedings where the landlord just wants the tenant out, whether he/she cures the default or not.
Based on the above, the Court concludes:
Landlord/tenant relations are an area of contract law the parties may not submit to arbitration, for it is contrary to the public order. Execution of the arbitration award is hereby denied.
Our landlord thought himself covered by the “rent guarantee” he purchased for 42 euros and which contemplated arbitration to collect rent and evict his unruly tenant. If someone sells that kind “guarantee”, the buyer has every right to believe that a default would lead to eviction through arbitration. As we can see, the landlord bought a sheet of paper worth no more that its price in an office supplies store.
Without leaving the building, we go a few court rooms down the hall. On the motion nº 1375/2007 to execute an award before the Court of First Instance of Madrid nº 21, we find the exact same grounds explained above to deny enforcement of the arbitration award. The ruling is not just similar, but verbatim.
We do not know if the court decisions were appealed. However, the appeal must be filed before the same court. It is unlikely that the landlords in these two cases would succeed before a court that believes arbitration is out of the question as a matter of law.
We note that neither court decision enters into the merits as decided by the arbitrators. Quite likely –almost certainly—the tenants defaulted, but as a factual finding it is irrelevant to the court. The conclusion of law interests the court. There can be no arbitration in landlord/tenant contracts, not as far as these two Magistrates are concerned.
If the reader is not familiar with the evolution of civil arbitration in Spain, may we explain that mandatory pre-dispute arbitration has been illegalized because the abuse was so aberrant. The same outfits which administered those “arbitrations” went on to prey on the rental market where the tenant is not considered a consumer and therefore is not protected from unconscionable predatory arbitration practice.
What is it about civil arbitration, about mandatory pre-dispute arbitration clauses, that has so many countries wondering whether to allow arbitration or ban it altogether? The answer is simple: Relatively easy and abundant money. Judges are getting tired of having to allow in arbitration a conduct unbecoming to the law, repugnant, unconscionable. Arbitration should be procedurally easier, less burdensome than ordinary court procedures, but some feel that imposing it on another places them on “easy street”. This is no way to promote responsible arbitration.
As we mentioned earlier the two decisions discussed do not establish jurisprudence. We have no idea how the Courts of First Instance will find in Valencia, Barcelona, Málaga, etc. However, we know that thousands of landlords have “rent guarantees” at home which are worthless in Madrid and probably worthless elsewhere. While a single trial court in another region in Spain may choose to enforce an award, they cannot now ignore that it is a roll of the dice (landing on a sympathetic court); there is not such guarantee to collect and to evict after all.
This phenomenon requires an additional comment. How did we get to a point where individuals (landlords) felt that a result could be guaranteed, that justice is for hire through arbitration in exchange for a 42-euro arbitration clause written into some heavy stock, luxurious looking, all-cotton sheet of paper? Who’s to blame?
Who’s to blame? “I paid 42 euros! I want justice!”. No, landlords will not admit having tried to buy results through arbitration. Landlords are going to start blaming those who sold them useless arbitration guarantees. Rental agencies will be blamed by landlords and in turn will blame the arbitration outfits who left stacks of clauses on their premises for them to resell to actual landlords. The whole thing is a joke, a sick, twisted joke of opportunistic greed.
Government finds itself now between a rock and a hard place. Government is trying to promote its own brand of state-sponsored, landlord/tenant arbitration. Government can’t, because it can’t ignore the two decisions discussed. Government will actually have to write arbitration into landlord/tenant law, or amend the Code of Civil Procedure, or both.
To end this discussion, it is noteworthy that the two decisions discussed did not go into how the clauses were purchased, pushed onto tenants and signed. While the Magistrates were probably disgusted, they focused on the law as they see it to send a clear message: arbitrating landlord/tenant disputes is contrary to the public order as established by law. Anti-arbitration judges? No, not really.
