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On 2 January 2025, the ‘Organic Law 1/2025 on Measures in the Matter of the Public Justice Service’ was published in the Official State Gazette, introducing significant changes to resolving disputes, by moving away from the traditional court route towards alternative dispute resolution methods.
Due to an increasing litigation culture and lack of out-of-court or pre-action protocols, the court system in Spain is experiencing an overflow of claims along with significant delays in the resolution of disputes.
Title I of the Organic Law aims to achieve more efficient organisation by focusing on three key qualities: specialisation, homogeneity and organisational capacity. For example, in the civil order, ‘Courts of Instance’ will be created to replace the current system of First Instance Courts. This involves the creation of a single court per judicial district, rather than numerous First Instance courts which are supported by a single Judicial Office. This will, in theory, bring about better specialisation to resolve disputes and reduce the time for handing down judgments.
Until now, in Spain there was no general rule requiring communications between the parties prior to proceedings being issued. It was also not mandatory to respond to an out-of-court claim, making the lawsuit the only effective measure to obtain a response from the counterparty.
The changes enter into force in April 2025, making “adequate means of conflict resolution” a prerequisite to issuing proceedings. In this article, we highlight some important points that the changes will introduce.
What constitutes an adequate means of conflict resolution?
Article 2 of the Organic Law defines this as “any type of negotiating activity, recognised in this or other laws, state or regional, to which the parties to a conflict resort in good faith in order to find an out-of-court solution, either by themselves or with the intervention of a neutral third party.”
Articles 14 to 19 list specific means including mediation, conciliation, the opinion of an independent expert and negotiation through lawyers.
How is the negotiation attempt accredited?
The Organic Law states that the attempt at negotiation outside of the traditional court route must be documented.
In the event that an independent third party does not intervene, any negotiation will be a document signed by the parties. If a third party has been involved, it will be the third party that issues the document.
The law provides for a period of thirty days to respond to a request to start negotiations. It is also clear that the negotiations are confidential.
Effects on the statutes of limitation
A request to initiate a negotiation procedure has the effect of interrupting the statute of limitations which is maintained until there is a settlement or the termination of the negotiations without agreement. In the event that a proposal does not receive a response from the counterparty within thirty calendar days, the calculation of time bars will be restarted or resumed respectively, therefore avoiding uncertainty about possible endless interruptions.
Impact on costs orders
The Organic Law introduces some important modifications with respect to costs.
Article 394 of the Spanish Civil Procedure Rules will be amended so that, notwithstanding the objective criteria of “whoever loses, pays”, there will be no costs order in favour of the party who has refused, expressly or by conclusive acts and without just cause, to participate in an adequate means of conflict resolution to which he or she has been effectively requested to participate.
Likewise, in the event of a partial upholding of a claim, the party who did not participate in the appropriate means of resolving disputes without just cause will be ordered to pay costs.
Modification of the personal income tax law in relation to taxation, compensation for civil liability for personal injury
The Organic Law amends Law 35/2006 so that the exemption provided for personal income tax related to compensation for personal injuries is also applicable to compensation that is paid by the liability insurer for settlements achieved via alternative dispute resolution methods.
However, to benefit from the exemption it is required that (i) a neutral third party has been involved in obtaining the agreement; and (ii) the agreement has been made in a public deed. In addition, the exemption will only operate up to a maximum amount equivalent to that resulting from applying the so-called scale of damages that applies to road traffic accidents.
Comment
The introduction of a mandatory negotiation process is a welcome step towards achieving a more efficient justice system and brings hope that futile claims will not reach the courts.
This will also necessitate a cultural change in society. The shift in the costs landscape will necessitate parties to be more proactive in their communications or risk facing economic sanctions.
With regard to insurance contracts, the amendments may also impact the obligations of policyholders to notify their insurer of a claim and the duty of information to the insurer under Article 16 of the Spanish Insurance Contract Act. It is easy to imagine that any order for costs imposed on an insured party because of its refusal to participate in a negotiation process could constitute a loss for the insurer if its insured had not notified the third party's claim on time, thus entitling the insurer to claim such a loss against the insured itself.
Spain