Hungarian Supreme Court confirms Res Iudicata effect of Arbitration Awards and the public policy nature of Res Iudicata effect

In a recent decision published under BH 2015.14, the Hungarian Supreme Court confirmed that arbitral awards have a res iudicata effect and that an arbitral award disrespecting the finality of an earlier award can be annulled on the basis of the public policy clause of the Hungarian Arbitration Law. The Supreme Court also clarified the scope of such effect, and its interpretation has important implication for litigants faced with incomplete arbitral awards.

(a)        The underlying arbitral awards

The case involved a series of arbitrations between the same parties in connection with a building contract. From the reasoning of the Supreme Court judgement, it appears that the claimant first filed a claim for contractual fee in the amount of HUF 509,212,682 and interest, with the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry. In the first arbitral award (“Award I“), the tribunal rejected the claim on the basis that the claimant had a legal basis for HUF 153,304,470, but its claim had been validly satisfied by the respondent’s setting off of a claim against it. Award I did not decide anything relating to interest on the above amount.

There is little information about the second arbitration procedure, but it seems that the tribunal confirmed that until the frustration of the contract, the claimant provided services to the value of HUF 153,304,470 and clarified the date when the original contract was frustrated (“Award II“).

In the third arbitration procedure, the claimant requested, among other things, interest after the lawful claim of HUF 153,304,470, from the date of the frustration of the contract, until the date of settlement, by way of setting off, as per Award I. The tribunal rejected this claim (“Award III“). According to the reasoning, Award I rejected the claimant’s claim of HUF 153,304,470 in capital, because the claimant did not perform services which corresponded to this claim. The “ruling of the [first] award […] rejected the plaintiff claim. The rejection thus extends to the capital as well as to the interest claim of the claimant“; thus this rejection has a res iudicata effect and Award III cannot override it by awarding interest.

(b)       The first instance judgment

The claimant requested the annulment of Award III, on the basis of point b) of Section 55 (2) of Act LXXI of 1994 on Arbitration (“Arbitration Law“), which permits the annulment of an award if it violates Hungarian public policy. According to the claimant, Award III violated public policy, since both Award I and Award II found that the claimant had performed services in the value of HUF 153,304,470; thus, the claimant can validly request interest on this capital for the period between its maturity upon the frustration of the underlying contract and its settlement by the setting off of another claim against it.

The first instance court rejected the request. As a matter of principle, it declared that arbitral awards have a res iudicata effect. Award I may violate certain procedural rules, because it fails to properly reason the calculation of capital and interest, but it nevertheless adjudicated the claimant’s claim for capital and interest with res iudicata effect. The first instance agreed with the claimant that the reasoning of Award III was not in line with Award I, because Award I explicitly found that the claimant performed services which entitled it to a fee of HUF 153,304,470. Nevertheless, according to the first instance court, this procedural infringement does not rise to the level of public policy, because it does not affect the social-economic order of Hungary. The first instance court arrived to this conclusion because it found that the irregularity or unlawfulness of the award did not have any wider implication outside of the parties’ contractual relationship.

(c)        The second instance judgement

Upon review, the Supreme Court sustained the first instance judgment. The Supreme Court clarified that the finality or the res iudicata effect of non-appealable judgments is a part of Hungarian public policy. This effect applies, even if the judgment is wrong on the merits. A violation of the res iudicata effect of a prior judgment or award is thus a violation of public policy and, thus, a ground for annulment.

The next issue to be examined was the scope of the res iudicata effect attached to Award I, taking into account that the underlying claim extended to interest, but Award I did not say anything about the tribunal opinion relating to interest and parties’ obligations and rights thereto. The Supreme Court thus had to decide whether Award I should be regarded as a final judgment only in relation to issues which were actually decided, or if it was also applicable in relation to every other issue which was brought before the tribunal. It was found that Award I must be regarded as a final decision on the claimant’s interest claim, too.

According to the Supreme Court’s reasoning, if the claimant believes that a claim has not been properly decided, then it can file a motion to complete the award in accordance with Section 44 (1) of the Arbitration Law. However, such incompleteness of an award cannot be remedied by filing a new claim and starting a new procedure; rather, it should be cured in relation to the award itself.

Thus, Award III properly deferred to the res iudicata effect of Award I. It would have violated the principle of res iudicata, if it had re-adjudicated the claimant’s interest claim decided already by Award I.

The Supreme Court otherwise found that the incorrect reasoning of Award III – according to which Award I would have been based on a finding that the claim for capital had been groundless, too – was irrelevant because the final ruling of Award III was not based on this finding, but rather on the tribunal’s deference to the res iudicata effect of Award I.

(d)       Comments

The decision is a further development and consistent application of the principles in Guiding decision in Business matters No 1969/009 relating to the annulation of Award II..

The most important implication of the case is that, under Hungarian law, a violation of the res iudicata or the finality of a prior award or judgment by a later arbitral award can serve as a ground for the annulment of such later award. This applies to res iudicata in the strict sense, when there is an absolute identity of parties, facts and rights enforced in the two proceedings. The case involved domestic arbitration, there is no indication whether the result of the analysis would be different in the case of an international arbitration award.

Another important implication of the case is that a claim will be considered as decided upon by an award if it was presented by the party. If a party to the arbitration believes that a claim was not dealt with in the award, a request for completion must be filed according to Section 44 (1) of the Hungarian Arbitration Law. Note that there is a strict 30 day deadline to file such a request for completion, starting from the date of the delivery of the award to the party.

The approach taken by the Hungarian Supreme Court in connection with the public policy nature of the res iudicata rule is in line with the practice of the Hungarian Constitutional Court, considering res iudicata effect as an important element of the rule of law. It is also in line with the practice of other municipal jurisdictions, some of which is willing to annul judgments violating the res iduicata effect of earlier judgments, even if there is no absolute identity of parties. See e.g. the noted Swiss case of Club Atlético de Madrid SAD v. Sport Lisboa E Benfica –Futebol SAD, Bundesgericht [BGer] [Federal Court] Apr. 13, 2010 (Switz.), where the Swiss courts considered set aside a Court of Arbitration for Sport Award sustaining a FIFA decision based on the 1997 FIFA Transfer Regulation, because it was irreconcilable with an earlier court judgment declaring the underlying FIFA Transfer Regulation null and void with erga omnes effect.

The Supreme Court’s interpretation of the scope of the res iudicata effect of an award also seems well founded on the merits. In the practice of domestic courts, even wider interpretations are known, such as the approach of common la jurisdictions developed on the basis of the famous Henderson v Henderson case [(1843) 3 Hare 100 114-115.], which found that the res iudicata effect of the earlier judgment precludes not only claims that were brought, but even claims that should have been brought before the earlier tribunal, if the claimant had acted with due care. However, it is questionable, whether the state courts’ review should indeed extend to the actual application of the res iudicata principle by the arbitration tribunal, to the interpretation of the scope of res iudicata effect attached to the prior decision, because this is a review of the content of the arbitral award.

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