Arbitrators' liability
Prohibition against insuring wilful misconduct
Comment
The recently passed Law 11/2011 has amended the Arbitration Law and has introduced, among other things, an obligation for arbitrators and arbitral institutions to take out an insurance policy in order to cover their potential liabilities. This update discusses the conflict between the Insurance Law and this new requirement for an obligatory insurance policy in connection with arbitrators' liability under Spanish law.
Pursuant to Section 21.1 of the Arbitration Law, arbitrators and arbitral institutions will be held liable for damages caused by "wilful misconduct, bad faith or recklessness" in the course of their duties. Thus, they will not be held liable for damages caused by negligence.(1)
Arbitrators' wilful misconduct or behaviour in bad faith,(2) in the course of their engagement as arbitrators, refers to instances where they intentionally fail to perform their duties as arbitrators (eg, issuing an enforceable award to resolve the dispute brought by the parties), while knowing that their actions could potentially have damaging effects for any of the parties involved in the arbitration. In such cases arbitrators will be held liable for any damages caused by their actions.(3)
Furthermore, 'recklessness' implies an especially irresponsible course of action that lacks even the most basic diligence. However, once again, this must be intentional, which means that arbitrators will be held liable only if they purposely perform their duties recklessly and damages are caused to any party as a direct consequence of such recklessness.
In order for arbitrators to be held liable for such damages, their intention to cause damage is thus a decisive factor. For arbitrators and arbitral institutions, this represents a major obstacle in fulfilling the requirement to take out an insurance policy to cover their liabilities.
Prohibition against insuring wilful misconduct
The idea of a compulsory insurance policy per se does not represent a particular problem, as many other activities and professions also require such insurance policies. For example, it is obligatory for a vehicle owner to take out an insurance policy to cover any liabilities arising from damages caused to third parties, and property developers must take out an insurance policy to cover any liabilities arising from construction defects.
However, Section 19 of the Insurance Law, which refers to the main obligation of the insurer to pay compensation if the event insured under the policy takes place, also expressly releases the insurer from this obligation if the event took place as a consequence of the insured party's bad faith.
This exemption applies to all types of insurance and is known as the "prohibition to cover intentionally caused damages". This prohibition is a matter of public policy, since allowing a person or an institution to enter into an insurance contract for damages caused intentionally would imply that unlawful damage causes could be covered.
Moreover, even if moral reasons were disregarded, there are also strict legal grounds for not allowing wilful misconduct or recklessness to be covered under an insurance policy:
- Uncertainty is at the core of any insurance agreement; essentially, an insurance policy covers an event that may or may not happen, irrespective of the party's intentions;(4) and
- Wilful misconduct, as well as recklessness, requires willingness, which de facto negates any uncertainty as to whether an event will take place.
Additionally, the prohibition in Section 19 is reflected in Section 76 of the same law, which specifically refers to liability insurance policies covering damages caused to third parties by events that may happen either accidentally or intentionally (eg, car accidents, fires). Section 76 allows the insurer to claim back from the insured party the compensation paid to the victim(s) of an accident or event if it were intentionally caused by the insured party.
Therefore, the problem with the newly established mandatory insurance policy is that arbitrators will be held liable for damages caused by wilful misconduct, bad faith or recklessness during the course of their duties (ie, the arbitrator must cause the damage intentionally or, at the very least, as a result of deliberate recklessness), but at the same time the Insurance Law prohibits covering blame.
Wilful misconduct cannot be insured under Spanish law; therefore, the liability of an arbitrator (as it is now understood) cannot be insured either. Hence, this is one more reason why the Arbitration Law should be amended with regard to arbitrators' liability. The general rule under Spanish law is that liability arises out of negligence; thus, there is no reason why arbitrators should not be liable on the very same basis. Negligence is the most common and general criterion for liability. Excluding it is an exception to this general rule and might create inconsistencies in the arbitration law, as discussed in this update.
Endnotes
(1) This exclusion has been strongly criticised by most legal scholars, as it clashes with:
- Sections 1101 to 1104 of the Civil Code (which set forth the general liability rules under Spanish law); and
- the attorneys' general statute (as it is usual to find attorneys acting as arbitrators).
Both of the above points contemplate liability arising from negligence.
(2) With regard to arbitrators' liability, 'wilful misconduct' and 'bad faith' are essentially equivalent terms and refer to the moral – rather than the criminal – concept of blame.
(3) This is the case regardless of whether they are direct or indirect damages and were foreseeable (ex. Section 1107 of the code).
(4) In fact, the premium paid by the insured party is estimated by taking into account the chance or probability of the covered event actually happening.
For further information on this topic please contact Félix J Montero at PEREZ-LLORCA by telephone (+34 91 436 04 20), fax (+34 91 436 04 30) or email ([email protected]).