Arbitration Update Spring 2009


Kenneth Svartström, Helsinki
Challenge to arbitration awards – a Finnish perspective

Traditionally, arbitration has been viewed as a quicker, less expensive and more discreet way of solving conflicts compared to litigation.

Whilst this is still partly true, there is growing concern, both in Finland and in the wider international community, that arbitration is becoming more like litigation. Parties to arbitration are starting to use procedures which are more normally associated with litigation. For example, requests for disclosure are increasing, as are the number of challenges to final rendered awards.

These developments tend to both increase legal costs and hinder the effective execution of arbitration awards and therefore diminish the advantages of arbitration versus litigation as a method of dispute resolution.

Ways to dispute a rendered arbitration award

Under Finnish law, an arbitration award is final and binding upon the parties. The only possibility to challenge the award is by initiating annulment proceedings or by disputing the execution of the award based on certain formal grounds as defined in sections 40 to 45 of the Finnish Arbitration Act (967/92) (the "Act").

According to section 40 of the Act, an arbitration award is null and void if:

(i) the arbitrators have ruled on an issue which according to Finnish law is not arbitrable;
(ii) the award contradicts fundamental principles of the Finnish legal system (ordre public);
(iii) the award is so unclear that the order contained within it cannot be determined; or
(iv) the award has not been issued in writing or has not been signed by the arbitrators.

According to section 41 of the Act, an arbitration award may be annulled if:

(i) the arbitrators have exceeded their powers;
(ii) the arbitrators have not been appointed in accordance with the Act;
(iii) the arbitrators have a conflict of interest; and/or
(iv) the arbitrators have not given a party sufficient opportunity to present its case.

Crucially, awards are automatically null and void if they fall under section 40, whereas section 41 provides the court with a discretion to nullify an award. A challenge of an award under section 41 must be filed within three months from the receipt of a copy of the arbitral award. In contrast, section 40 does not impose such a deadline.  By challenging an award, a party can at the very least delay the enforcement of such award.

In order to enforce an arbitral award, a party must apply this to the local District Court. Once the District Court has ordered the enforcement of the award, this will be carried out by the enforcement authorities as with any type of final verdict.

Practical application of the law

The Finnish Supreme Court rarely needs to consider claims under section 40 of the Act. Since the Act entered into force in 1992, there have been only a few decisions regarding arbitration issues and only one recent decision (KKO 2008:77) concerning the annulment of an arbitral award.  Of the handful of cases which have reached the appellate courts, very few awards have been nullified.

In KKO 2008:77, the dispute centred around a distribution agreement between the parties, which contained a clause stating that the distributor was not allowed any compensation upon termination of the distribution agreement. The distributor commenced arbitration proceedings seeking that this clause be declared null and void on account of legislation in Finland and Austria.

The Tribunal rejected the claimant's arguments in part and found the clause to be valid. Nevertheless, the Tribunal ordered the defendant to pay compensation based on the fact that the application of the clause would be unreasonable to the distributor. The defendant appealed this decision on the basis that the claimant had not asked for or referred to this alternative form of relief during the arbitration proceedings. As such, the defendant claimed it had not had opportunity to argue its case properly.

On appeal, by a narrow majority (3:2) the Supreme Court voted to reject the appeal and upheld the arbitration award. The Supreme Court accepted that arbitrators had acted properly in taking into account circumstances and arguments which the parties had not directly referred to in their cases. According to the court, by entering into arbitration over the validity of the distribution agreement clause, both the claimant and the defendant had accepted that the arbitrators could take an equitable approach in reaching their decision. As such, the "compromise" outcome reached by the tribunal could not be said to be a surprise to the defendant. The defendant was deemed to have had sufficient opportunity to respond to any issues of fairness during the initial tribunal hearing, as these issues also arose in response to the claimant's stated case that the clause be declared null and void.

It is difficult to foresee the effects of this decision on arbitration issues in Finland. Some experts consider that the Supreme Court was quite liberal when upholding the award and allowing this much freedom for the tribunal to interpret the parties' intentions.  On the other hand, the decision suggests that the threshold to annul arbitral awards still is quite high and that the annulment of awards is only appropriate in cases where exceptional material or procedural faults have occurred.  

Virginie Geeraert, Paris
Challenges to arbitration awards in France

The French courts are very reluctant to challenge arbitration awards, and the grounds on which the cancellation of an award may be obtained are both limited and also construed in a very restrictive manner.
 A foreign arbitration award can be challenged only if one of the five following conditions is met (there are additional grounds on which a French arbitration award can be challenged):

  1. the lack of valid arbitration agreement;

  2. an incorrectly appointed arbitration court;

  3. a breach of arbitrator's powers;

  4. a violation of the defendant's rights to a fair hearing; or

  5. a violation of the international public order.

  6. The examination by the French courts is strictly limited to these five criteria, and as such they can never review the merits of the case itself.

The strict application of these criteria has been regularly confirmed in case law. As a result of this, very few arbitration awards have ever been cancelled in France, and it has only occurred in specific cases where there has been evidence of a major and substantive breach corresponding to one of the five criteria set out above. For example, with regard to the potential violation of the defendant's rights, the French courts would not cancel an award if (for example) necessary documentation had merely been provided late to the defendant, but only in the case where it had not been provided at all.

Hong Kong
Roberta Chan, Hong Kong
Setting aside & refusing enforcement of arbitral awards in China

For updated information on the enforcement of arbitral awards in China, please visit our article from 2012: Enforcing arbitral awards in China

The Netherlands
Eggo Jan Rietema, The Hague
The Netherlands Arbitration Act – delays to arbitration proceedings
Arbitration is supposed to offer a swift and efficient solution to disputes. In countries where arbitration is institutionalised, the reduced length of arbitration proceedings in comparison to proceedings before regular courts remains the basic principle and goal.  The potential speed of arbitration proceedings is generally one of the main reasons why parties will agree to arbitration in their contracts.

A well known type of arbitration in The Netherlands is institutionalised by the Netherlands Arbitration Institute (NAI), which incorporates several provisions into its arbitration rules that are meant to ensure that proceedings are dealt with swiftly. One of these provisions places an obligation on the arbitral tribunal to render its decisions with all due dispatch. However, the arbitration rules of the NAI contain no sanction for any breach of the rules. Therefore, a question arises as to the options available to the parties in an arbitration where they are faced with an arbitral tribunal that manages the arbitration in an unacceptably slow manner.

In a recent NAI arbitration one of the parties faced exactly this problem. Although the average duration of NAI arbitration is nine months, in this particular case, after two and a half years only an interim decision had been rendered, and the proceedings were likely to last at least another year. The tribunal admitted to being at least partially responsible for the delay, having been reprimanded twice by the NAI itself and also once by a party to the arbitration proceedings.

The Netherlands Arbitration Act ("the Act") mandatorily applies to any arbitration that takes place in The Netherlands. Article 1031 of the Act states that on the request of a party, the (regular) court can, taking all circumstances into account, terminate the arbitral tribunal's mandate if the tribunal has carried out its mandate in an unacceptably slow manner, and has already been subject to a repeated reminder. If the mandate is subsequently terminated, the competence of the regular courts is revived, unless a new arbitration agreement is entered into between the parties.

This provision had never previously been relied upon, and so when such a request was made to the Court of Rotterdam last year, it had to be dealt with without recourse to precedent.

Although the Court of Rotterdam acknowledged that the delay in the proceedings was 'unheard of', it saw particular relevance in the requirement of repeated reminder. Although Article 1031 of the Arbitration Act is silent with regards to who should send reminders to the tribunal, the Court decided that the legislator must have intended this to mean the party making the request. As this party had urged the tribunal only once, the request was eventually rejected, despite the fact that the NAI had also reminded the tribunal twice.

The question is whether the court's decision deserves any applause. As (unsuccessfully) argued in this case, a party to arbitration will generally be very reluctant to urge the arbitrators in a case where that party is dependent on the same arbitrators' decisions.

Blas Piñar Guzmán, Madrid

The Court of Arbitration of Madrid launches new arbitration Rules
On January 1 2009 the Court of Arbitration of the Official Chamber of Commerce and Industry of Madrid ("Court of Arbitration of Madrid") published its new Statutes and Rules. Created in 1989 the Court of Arbitration of Madrid is one of Spain's leading arbitration institutions, dealing with more than a hundred disputes each year.
The reform is aimed at updating the existing procedures and encouraging the use of the Court of Arbitration of Madrid by fulfilling the needs of international businesses. In doing so the reform has taken into account the regulations issued by the United Nations Commission on International Trade Law (UNCITRAL), the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA). The drafting of the new Rules has been carried out by a team of experts, including the Spanish Arbitration Club (Club Español del Arbitraje, which brings together leading individuals from the Ibero-American arbitration world), arbitrators from the Court and also lawyers who specialise in arbitration. This team has not only assisted in drafting the New Rules, but has also been consulted on which aspects of the existing procedures it regards as most significant.

The foundations of the new Rules are that flexibility and choice of action of the parties involved are of paramount importance in arbitration proceedings. The Rules also respond to a number of practical issues that have arisen due to the growing intricacy and internationalisation of business, and which had not been resolved satisfactorily by law or by other arbitration rules.

The main developments and significant enhancements of the new Rules are as follows:

  • The parties are now free to choose the location, language, arbitration procedure and the arbitrators for the arbitration. If no choice is made, then by default the place of arbitration will be the city of Madrid and the language of arbitration will be Spanish. The parties may agree to modify the rules of procedure, but any such modifications must observe the Spanish Arbitration Act (Ley 60/2003) and must be expressed in writing.

  • If the Court of Arbitration of Madrid is not convinced of the existence of a clear prima facie arbitration agreement whereby resolution of the dispute is entrusted to the Court of Arbitration, it can notify the parties that the arbitration cannot proceed. The claimant can subsequently request that the Court completes the appointment of the arbitrators in order that they review this decision. However, if the decision of the arbitrators ratifies the view adopted by the Court, the claimant will bear the costs of the matter.

  • A number of improvements to the procedure concerning precautionary measures, evidence and the appearance of third parties have been introduced. There are also plans for an online system which can be used to submit documents for the arbitration electronically. Where documents are submitted electronically, paper copies will not be required.

  • The period for concluding international disputes by way of arbitration has been extended to six months, which runs from the date the statement of defence is submitted. However, by submitting to the new Rules, the parties give authority to the arbitrators to extend the time limit for making the award by a further two months, if it is necessary for the satisfactory conclusion of the case. The time limit for making the arbitration award may be also be extended by the agreement of all the parties.

  • As under the previous rules, all awards made remain private and confidential. However in circumstances where the Court believes an award is of interest for legal precedent purposes it may be made public, providing that the parties do not object its publication, and that all references to the names of the parties and other identifying information are removed.

  • With regards to costs, the principle followed by the new Rules is that they should be split in proportion to each party's relative success or failure in the case.

  • The costs of arbitration at the Court of Arbitration of Madrid have been revised to make them more competitive, and are now around 50% of what would be charged by the ICC for a similarly-sized arbitration.

  • The new Rules also provide a route for smaller claims (less than 100,000 Euros) to be fast-tracked.

The Court of Arbitration of Madrid is already one of the leading arbitration institutions in Spain. With these new Rules, The Chamber of Commerce and Industry hopes that the improvements will result in the Court becoming one of the key centres for both national and international arbitration. However, only time will tell whether the reforms have served their intended purpose.

Fredrik Norburg, Stockholm
2008 new record year for the SCC Institute

In 2008 the Arbitration Institute of the Stockholm Chamber of Commerce (the SCC Institute) set a new record with 176 new arbitration cases filed. The SCC Institute maintains its position as a worldwide arbitration institution, in particular for East-West disputes with parties from the former CIS countries and China on one side, and parties from Europe, the US and Canada on the other side.

 Arbitrators' fees

Under the Swedish Arbitration Act a decision concerning the arbitrators' fees can be appealed to court. However in the academic debate and preparatory work leading to the Act, it was noted that this provision is not intended to be applicable when the fees in question have been decided by a third party, such as an arbitration institution, rather than the arbitrators themselves. In December 2008 the Supreme Court concluded that this does not mean that a court can reject such an appeal out of hand, but that instead it must adjudicate it on the merits. However, such an adjudication is likely to be limited to the issue of whether the decision on fees was made in accordance with the rules of the arbitration institution in question.  

Arbitrator's impartiality questioned because of many assignments from the same firm

During a period of 10 years, 10% of an arbitrator's referrals came from various lawyers from the same law firm. As a result of this, an arbitration award made by the arbitrator was challenged on the grounds of a lack of independence and impartiality of the arbitrator. In December 2008 the Svea Court of Appeal concluded that where an arbitrator is regularly appointed on matters from the same law firm, there is the possibility that this may compromise the arbitrator's independence. However, in making this judgment, the court stated that other factors must also be taken in to consideration – for example, whether the arbitrator is economically dependent on referrals from the firm in question; whether the number of referrals from the firm in question is disproportionate to the number received from other law firms; and whether these referrals come from a limited number of lawyers within the firm. Having considered these factors in the particular case, the Court of Appeal dismissed the challenge.