In November 2020, the Czech Supreme Court issued two decisions that are of a great importance for the development of arbitration proceedings in the Czech Republic. These were the Judgment of the Supreme Court File No. 23 Cdo 1337/2019 dated 18 November 2020 (“Supreme Court Judgement”), and the Resolution of the Supreme Court File No. 23 Cdo 3972/2019 dated 18 November 2020 (“Supreme Court Resolution”). These two decisions of the Supreme Court will inevitably contribute to the cultivation of arbitration proceedings in the Czech Republic and to better predictability of court decisions regarding impartiality of arbitrators. This case law of the Supreme Court is even more valuable because the decision-making in arbitration matters in the Czech Republic is not concentrated in specialized courts, as is the case in the Austrian Republic or in the Swiss Confederation.
Key Conclusions of the Supreme Court Judgement
Facts of the case
In proceedings File No. 23 Cdo 1337/2019, the Supreme Court dealt with the action for cancellation of an arbitration award rendered by the Arbitration Court attached to the Chamber of Commerce of the Czech Republic and the Agricultural Chamber of the Czech Republic pursuant to Sec. 31 letters (c) and (e) of Act No. 216/1994 Sb., on Arbitration and Enforcement of Arbitration Awards (“Arbitration Act”). Pursuant to Sec. 31 letter (c) of the Arbitration Act, a court will cancel an arbitration award if an arbitrator involved was not empowered to issue the award, either based on an arbitration agreement or otherwise, or was not qualified (eligible) to serve as an arbitrator. Pursuant to Sec. 31 letter (e) of the Arbitration Act, the court will also cancel an arbitration award if a party was not provided with an opportunity to present the matter before arbitrators.
The plaintiff particularly asserted that there were issues raising serious doubts as to the impartiality of the presiding arbitrator. The plaintiff pointed out that more than one month before the first hearing in the case, the presiding arbitrator had informed his fellow arbitrators (but not the parties to the arbitration) in writing that the law firm for which he worked had provided legal assistance to the defendant, assessing this situation as moderately severe with reference to the orange list of the IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”). The arbitration tribunal did not disclose this information to the parties to the dispute. The first instance court dismissed the action for the cancellation of the arbitration award, but the appellate court reversed the judgment of the first instance court and cancelled the arbitration award on the grounds that failure to disclose the information to the plaintiff was contrary to Sec. 18 of the Arbitration Act and the plaintiff was unable to plead bias of the arbitrator and, therefore, was not given the full opportunity to present the case, which justified cancellation of the arbitration award pursuant to Sec. 31 letter (e) of the Arbitration Act.
Legal framework on disqualification of arbitrators
Pursuant to Sec. 8 para (1) of the Arbitration Act, an arbitrator shall be disqualified if there is a reason to doubt the arbitrator’s impartiality given his/her relationship to the given matter, the participants or their representatives. According to the case law and the commentators, impartiality has two components – independence and impartiality. Independence means the objective absence of an arbitrator’s personal, professional or economic relationships to parties to a dispute. Impartiality means the absence of subjective favoring of one party to a dispute. Furthermore, pursuant to Sec. 8 para (2) of the Arbitration Act, anyone to be, or having been, designated or appointed an arbitrator is obligated to immediately inform the parties or the court about any circumstances that could raise justified doubt as to his/her impartiality and on account of which he/she would be disqualified as an arbitrator (i.e., the duty to make a disclosure). Pursuant to Sec. 11 of the Arbitration Act, an arbitrator already designated or appointed will be disqualified from hearing the matter if any circumstances as specified in Sec. 8 of the Arbitration Act subsequently appear. In such cases, an arbitrator is obligated to resign as arbitrator pursuant to Sec. 12 para (1) of the Arbitration Act, and if the arbitrator does not do so himself/herself, any party may request the court to decide on the disqualification of the arbitrator pursuant to Sec. 12 para (2) of the Arbitration Act.
A breach of an arbitrator’s duty to make a disclosure does not automatically result in the disqualification of the arbitrator from the case
The Supreme Court emphasized that a breach of an arbitrator’s duty to make a disclosure pursuant to Sec. 8 para (2) of the Arbitration Act does not in itself constitute a reason for disqualifying such arbitrator from deciding the case or for cancelling an arbitration award. If a particular circumstance in itself does not unequivocally constitute a reason to cast doubt upon the impartiality of an arbitrator and could not lead to the disqualification of the arbitrator, it is impossible to reject (disqualify) the arbitrator solely based on a pleaded breach of the duty to disclose such irrelevant circumstance. Pursuant to Sec. 8 of the Arbitration Act, an arbitrator shall be disqualified not for a breach of his/her duty to make a disclosure, but for his/her relationship to the matter, the participants or their representatives and for a justified doubt as to his/her impartiality in relation thereto. The absence of impartiality shall not be merely presumed; it must be established by evidence. It is up to the party claiming lack of independence or impartiality of an arbitrator to prove its claims in proceedings before a court.
Disqualification of an arbitrator is merely a reason for cancellation of an arbitration award pursuant to Sec. 31 letter (c) of the Arbitration Act
The Supreme Court further stated that the lack of impartiality of an arbitrator precludes an arbitration from being duly conducted without any further ado, thus it is redundant to consider whether or not the arbitrator proceeded so as to deprive a party to the arbitration of the opportunity to have the matter heard before arbitrators pursuant to Sec. 31 letter (e) of the Arbitration Act. An arbitrator’s bias in itself constitutes a ground for the cancellation of an arbitration award pursuant to Sec. 31 letter (c) of the Arbitration Act.
Only objectively understood absence of impartiality constitutes grounds for bias
The Supreme Court is of the opinion that bias as defined under Sec. 8 para (1) of the Arbitration Act is, above all, an expression and demonstration of lack of impartiality, i.e., the subjective favoring of one of the parties to a dispute, which has reached a certain degree and intensity and may be objectively examined. It is also relevant that not every subjectively understood lack of impartiality objectively constitutes bias and, hence, grounds for the disqualification of an arbitrator. In the Supreme Court Judgement, the Supreme Court referred to its previous case law with respect to the issue of independence and impartiality of arbitrators. In proceedings File No. 23 Cdo 3150/2012,[1] the Supreme Court specifically considered whether professional contacts and cooperation between the law office of an arbitrator and the legal representative of one of the parties to arbitration in tendering for joint representation of the Czech Republic in another matter would result in the disqualification of the arbitrator for bias. The Supreme Court concluded that it would not. The Supreme Court was of the opinion that not even the concurrent membership of an arbitrator and a representative of a party to arbitration in a professional or social organization raises justified doubt as to the impartiality of the arbitrator. This is because it may well be expected in practice that arbitrators who are attorneys-at-law will commonly have business dealings with other attorneys-at-law, and such contacts do not automatically have to be a circumstance giving rise to justified doubt as to the actual relationship of the given arbitrator to another attorney-at-law as the representative of a party to arbitration.
The Czech Supreme Court has in the past dealt with the issue of “economic dependency of an arbitrator.” In Resolution File No. 20 Cdo 4022/2017 dated 23 January 2018, the Supreme Court unequivocally concluded that repeated appointments of an arbitrator in arbitration agreements did not prove any personal relationship of the arbitrator to the given matter, the participants or their representatives. In other words, it is not possible to consider it as a dependent relationship solely because an arbitrator is eligible for remuneration for each matter resolved by him/her. This conclusion of the Supreme Court was also re-confirmed in the Supreme Court Judgment. Nevertheless, the Supreme Court admitted that justified doubt as to the relationship of an arbitrator who is an advocate to another advocate representing a party to arbitration where such arbitrator has been appointed, could be established, if there is a long-term cooperation having the nature of certain economic dependency, such as cooperation within one law firm.
An arbitrator may be disqualified from hearing and deciding a matter for bias only once it becomes objectively evident that the relationship of the arbitrator to the given matter, the participants or their representatives is of such a nature and of such intensity that the arbitrator would not be able to decide independently and impartially. The arbitrator is disqualified from hearing a matter only where the absence of impartiality of an arbitrator has been objectively established by the evidence taken. Bias may also be established by long-term cooperation between an arbitrator and a party or its legal representative, which has the nature of a certain economic dependency.
IBA Guidelines on Conflicts of Interest in International Arbitration as a “source of inspiration”
The IBA Guidelines not only set forth the general principles for considering a conflict of interest, but they also include practical examples of how to apply these general principles in practice. Despite the IBA Guidelines not being one of the sources for Czech law, they may serve as an inspiration, although their application always needs to be assessed in the context of Czech legal regulations.
This positive recognition of the IBA Guidelines by the Czech Supreme Court as a possible source of inspiration is a welcome step that may provide a higher degree of certainty to parties in appointing, or disqualifying, arbitrators in the future.
Key Conclusions in the Supreme Court Resolution
In the Supreme Court Resolution, the Supreme Court addressed the issue of whether the absence of impartiality of an appointing authority renders an arbitration clause invalid in its entirety. In this respect, it is to be noted that Sec. 7 para (1) of the Arbitration Act expressly envisages that an arbitrator may be appointed by a specific third party or based on arbitration rules as attached to the arbitration clause.
The absence of impartiality of an appointing authority results in the disqualification of an arbitrator, not in the invalidity of the entire arbitration clause
In the Supreme Court Resolution, the Supreme Court concluded that the requirements for independence and impartiality of arbitrators also needed to be applied to the independence and impartiality of persons appointing an arbitrator. However, the situation where a matter is to be heard and decided by an arbitrator appointed by a third person not being independent or impartial does not in itself result in the invalidity of the arbitration clause as such, but merely in the disqualification of the arbitrator from hearing and deciding the case pursuant to Sec. 8 para (1) of the Arbitration Act.
The Supreme Court also expressly noted some of the grounds for bias pursuant to Sec. 8 para (1) of the Arbitration Act. According to the Supreme Court, these particularly included situations where an arbitrator was concurrently a party to the proceedings or a witness, or where an arbitrator’s rights could be affected by the proceedings or their outcome. Similarly, an arbitrator is to be disqualified if he/she has a friendly or apparently hostile relationship or a relationship of economic dependency to participants to the proceedings. The Supreme Court also confirmed in the Supreme Court Resolution that a relationship of economic dependency was not given by the mere fact that an arbitrator was repeatedly named in arbitration agreements. Thus, the case law of the Supreme Court on this issue may be considered as quite established.
Conclusion
Both the Supreme Court Judgment and the Supreme Court Resolution are major contributions to Czech arbitration, as they provide detailed answers to a number of practical questions arising when the impartiality of an arbitrator pursuant to Sec. 8 para (1) of the Arbitration Act has been questioned. It is also possible to apply the requirement for impartiality of an arbitrator to an appointing authority.
To conclude, the absence of an arbitrator’s impartiality cannot be merely presumed; the relevant facts causing doubts regarding the impartiality must be established by evidence taking. Only if the reason for doubts as to impartiality has been duly established, an arbitrator may be disqualified from hearing and deciding the case, or the arbitration award may be cancelled pursuant to Sec. 31 letter (c) of the Arbitration Act. In any event, it should be noted that a court shall reject a petition for the cancellation of an arbitration award due to lack of impartiality of an arbitrator or due to absence of the arbitration agreement pursuant to Sec. 33 of the Arbitration Act to the extent the party seeking the cancellation of the arbitration award had not raised the reason for its cancellation before it began pleading on the merits.
[1] Judgment of the Supreme Court File No. 23 Cdo 3150/2012 dated 30 September 2014, which was published in the Collection of Judicial Decisions and Opinions of the Supreme Court under No. 29/2015
