CZECH REPUBLIC

Martin Hrodek and Martina Závodná

A. LEGISLATION AND RULES

A.1      Legislation

International arbitration in the Czech Republic continues to be governed by Act No. 216/1994 Coll., on Arbitration Proceedings and Enforcement of Arbitration Awards, as amended (“Arbitration Act”). The Arbitration Act is based on the UNCITRAL Model Law and has not been amended since 2017. Pursuant to Section 30 of the Arbitration Act, the Czech Rules of Civil Procedure (Act No. 99/1963 Coll., as amended) are to be used adequately as a subsidiary law.

A.2      Institutions, Rules and Infrastructure

The most-used arbitration institution in the Czech Republic is the Arbitration Court of the Czech Economic Chamber and the Czech Agrarian Chamber. However, there are two other arbitration courts with international ambition – the International Arbitration Court of the Czech Commodity Exchange and the Exchange Court of Arbitration. However, these courts have statutory jurisdiction limited to disputes arising from transactions settled out on them and thus have not attracted many cases so far.

B. CASES

B.1      Exclusion of Arbitrators due to Economic Dependence

In proceedings File No. 33 Cdo 3285/2018 and File No. 33 Cdo 1034/2018 the Supreme Court of the Czech Republic (“Supreme Court”) dealt with the question of exclusion of arbitrators due to their economic dependence on one of the parties. In particular, the Supreme Court assessed whether the arbitrator should be excluded due to the fact that he/she has been repeatedly nominated by the party as an arbitrator.

The Supreme Court clearly stated that repeated nomination of the arbitrator does not, as such, suffice as a ground for exclusion of the arbitrator provided that there is no other ground for his/her exclusion. Repeated nomination may only serve as a mere indicator of the grounds for exclusion. In the view of the Supreme Court, the impartiality of the arbitrator must be assessed taking into account all particular circumstances of the case. The arbitrator may only be excluded if his/her relationship with the parties or their representatives or connection to the subject matter of the case leads to a conclusion that it is self-evident that he/she will not decide independently or impartially. The Supreme Court noted that such a situation occurs in cases where the arbitrator also acts as a party or a witness in the proceedings or if the outcome of the case would impact his/her rights. Similarly, it is argued that the arbitrator would not decide independently and impartially if he/she is a relative of one of the parties or in case he/she has a friendly or unfriendly relationship with the parties or he/she is economically dependent on one of the parties. The Supreme Court concluded that economic dependence must be understood as a direct economic relationship, i.e., if the arbitrator acts as an employee of one of the parties, its business partner or a work colleague in employment or similar relationship. On the other hand, economic dependence is not connected to the right of the arbitrator to receive an arbitrator fee for each and every arbitration case in which he/she acts as an arbitrator and delivers an arbitration award. Therefore, repeated nominations on its own are not sufficient grounds for exclusion of the arbitrator.

In judgment File No. 23 Cdo 926/2019 dated 26 July 2019 the Supreme Court gave further guidance regarding the economic dependence of arbitrators. In particular, the Supreme Court assessed whether the arbitrator should be excluded on the grounds of lack of impartiality due to the fact that he used to provide legal services in a law firm that provided legal services to one of the parties. It should be noted that (a) legal services provided by the law firm were not connected to the ongoing arbitration proceedings, and (b) the arbitrator was not personally involved in the provision of legal services to the party in question. The Supreme Court used the same criteria as in the previous proceedings described above (File No. 33 Cdo 3285/2018 and File No. 33 Cdo 1034/2018) and came to a conclusion that a mere fact that the arbitrator used to provide legal services in a particular law firm does not raise any reasonable concerns about the impartiality of the arbitrator.

It can be concluded that the Czech Supreme Court uses reasonable criteria to assess whether the arbitrator should be excluded on the grounds of lack of impartiality due to economic dependence on one of the parties. Neither repeated nomination alone nor the mere fact that the arbitrator used to provide legal services in a law firm that provided legal services to one of the parties serve as sufficient grounds for exclusion of the arbitrator.

B.2      Suspension of Limitation Period due to Commencement of Arbitration Proceedings

The Constitutional Court of the Czech Republic (“Constitutional Court”) issued on 17 July 2019 an important ruling File No. I. ÚS 1091/19 regarding the suspension of limitation period due to the commencement of arbitration proceedings based on an invalid arbitration clause.

The ruling follows settled case-law of the Supreme Court which developed based on its landmark decision File No. 31 Cdo 1945/2010 dated 11 May 2011 (“Landmark Decision”) in which the Supreme Court concluded that an arbitration clause which neither contains direct nomination of an ad hoc arbitrator nor specifies particular method of nomination and appointment of the arbitrator, but merely refers to rules issued by a private company specialized in dispute resolution (i.e., a company which was not established by law as an arbitration court), is invalid. In the past, such invalid clauses were included in numerous consumer contracts, especially contracts between consumers and non-banking institutions providing loans.

It is also settled case-law that the limitation period is suspended for the duration of the arbitration proceedings, even if such arbitration proceedings were initiated based on the invalid arbitration clause.[1] Likewise, the limitation period is suspended for the duration of the enforcement proceedings, even if such enforcement proceedings were initiated based on arbitration award which has no legal effect due to the fact that the arbitrator(s) lacked jurisdiction to issue such an arbitration award.[2]

In proceedings File No. I. ÚS 1091/19 the Constitutional Court upheld the above principles regarding the suspension of the limitation period in connection with invalid arbitration clauses and ineffective arbitration awards issued by arbitrator(s) lacking jurisdiction. However, the Constitutional Court stated that the situation is different in case of arbitration proceedings initiated after 11 May 2011 when the Supreme Court issued its Landmark Decision on the invalidity of arbitration clauses which refer to rules issued by a private company specialized in dispute resolution for the purposes of nomination and appointment of arbitrator(s). The Constitutional Court noted that the Landmark Decision of the Supreme Court has been widely discussed by both legal professionals and public media. Therefore, it concluded that commencement of arbitration proceedings by one of the largest non-banking institutions providing loans to consumers over nine months after issuance of the Landmark Decision constitutes an abuse of law. For this reason, the Constitutional Court decided in this particular case, that the limitation period has not been suspended for the duration of the arbitration proceedings initiated based on the invalid arbitration clause and connected enforcement (execution) proceedings based on arbitration award issued in such arbitration proceedings.

Since December 2016, consumer contracts may not contain arbitration clauses as a matter of law. However, there are still numerous ongoing proceedings against consumers based on invalid arbitration clauses without proper specification of nomination and appointment of arbitrator(s) as described in the Landmark Decision. Thus, the decision of the Supreme Court will play an important role in the assessment of claims raised by the creditors after the issuance of the Landmark Decision.

 

[1] For example judgment of the Supreme Court File No. 23 ICo 19/2015 dated 1 June 2016

[2] For example judgment of the Supreme Court File No. 29 ICo 41/2014 dated 30 June 2016

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