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Constitutional Court undermines finality of arbitral awards

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02 February 2012

In a controversial decision the Slovak Constitutional Court has ruled that an arbitral award may be subject to constitutional review as to whether it infringes fundamental rights.

The decision has the potential to undermine the principle of finality and limited review of an arbitral award by creating a new avenue of appeal for an unsuccessful party.

Slovakia’s Constitutional Court, as in many Central European countries, is modelled on the German Federal Constitutional Court. It has jurisdiction not only to review the constitutionality of legislation, but also to hear complaints by private individuals who claim that their fundamental constitutional rights have been breached by a public authority. Such rights include the right to a fair trial pursuant to Article 6 of the European Convention on Human Rights (ECHR). On this basis, the Constitutional Court often reviews decisions of ordinary state courts on the basis, it is argued, that a state court is a public authority. However, it has been generally understood until now that the Constitutional Court does not have authority to review or set aside arbitral awards.

The Slovak Arbitration Act, inspired heavily by the 1985 UNCITRAL Model Law, provides for a limited list of grounds on which ordinary state courts can set aside arbitral awards. These include in particular invalidity of the arbitration agreement, unequal treatment of the parties, criminal offence of the arbitrator or non-arbitrability of the matter. Neither a mistake in law nor a failure to give reasons – nor, surprisingly, public policy – is listed among the grounds for a challenge.

Facts

The claimant lent EUR 6,000 to three individual borrowers, who were jointly and severally liable. On the borrowers’ default, the claimant first sought and obtained an arbitral award against two of the borrowers. The award was issued by the arbitral institution agreed in the loan agreement. The claimant then sought to obtain another award from the same arbitral institution against the third borrower. This time, however, the claim was dismissed by the tribunal on the basis that the claimant should have brought the claim against all of the jointly and severally liable borrowers at the same time. This conclusion is wrong as Slovak law allows a creditor to sue each jointly and severally liable debtor individually for the whole amount.

Since he could not identify any grounds for the award to be set aside by a state court under the Arbitration Act, the claimant filed a complaint with the Constitutional Court, alleging that the second award breached his constitutional right to a fair trial, right to legal protection and right to ownership.

The court’s reasons

The Constitutional Court stated that this is the first case in which it has decided to assess the legality and constitutionality of an award issued by a private arbitral institution. It affirmed that state court intervention in arbitral proceedings should be kept to a minimum, in accordance with the Slovak Arbitration Act. Nonetheless, it went on to state that, even if arbitral proceedings are “simpler” than proceedings before state courts, there are certain basic principles of justice, legality and constitutionality enshrined in the Slovak Constitution and the ECHR that must be observed. These were found to have been breached by the arbitral institution, since the second award was based on an obvious mistake of law and since it did not contain clear and understandable reasons for the conclusions made. Given that the claimant could not exercise any other remedy against the award under Slovak law, the Constitutional Court ruled that its authority to set aside state court judgments for reasons of unconstitutionality should by analogy also apply to awards issued by private arbitral institutions. The award was therefore set aside and the arbitral institution was ordered to hear the case again.

Comment: In its quest for justice, the Constitutional Court has inadvertently opened a potential additional avenue for the challenge of an arbitral award. In addition to the two basic procedural principles applicable to Slovak arbitration enshrined in the Arbitration Act, namely the equal treatment of the parties and their opportunity to present their case, which have been construed rather narrowly, the stricter test of a fair trial will now have to be applied to arbitrations conducted in Slovakia. The test of fair trial as developed by the European Court for Human Rights and the Slovak Constitutional Court includes inter alia also the obligation to provide sufficient reasoning. Therefore, the decision potentially undermines the principle of the finality of arbitral awards as dissatisfied parties to arbitral proceedings will be tempted to use the constitutional complaint procedure as another form of challenging an award.

In Slovakia, finance agreements often contain arbitration clauses to avoid lengthy and sometimes unpredictable proceedings in state courts. Banks are obliged by law to offer, to all clients, arbitration clauses submitting disputes to the Permanent Arbitration Tribunal of the Slovak Banking Association. As a result, banking and financial transactions are often arbitrated in Slovakia. If the Constitutional Court positions itself as a the ultimate guardian of fundamental procedural rights in arbitration proceedings, the finality of awards and the speed of proceedings could be jeopardised.

Under Slovak law, all locally rendered awards are treated as domestic even if they are international in character. Therefore, this precedent may also affect international disputes, if they find their way into the Slovak judicial system. For example an international bank providing financing to a Slovak debtor and agreeing to arbitration in Slovakia, may find its award being reviewed by the Slovak Constitutional Court.

Finally, the question of whether arbitration awards are subject to constitutional review has also been debated in other countries in the region, for example in the Czech Republic, where the Constitutional Court has consistently rejected this notion. The Slovak decision may, theoretically, serve as a precedent for other constitutional courts that may be eager to expand their powers of review over arbitration.

Where on the Web

Case No III ÚS 162/2011-34. Full-text Slovak language version is available at: http://www.concourt.sk/rozhod.do?urlpage=dokument&id_spisu=393604.

Further Information

The European Finance Litigation Review is a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions.  For more information please contact Amy Edwards amy.edwards@alleovery.com.

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