In one of its recent cases the Hungarian Supreme Court had to decide whether or not an arbitration institution is liable for the allegedly unlawful content of an arbitral award. The Supreme Court approached the question of liability in a new way – compared to its previous judgement in a similar case – because it reviewed the content of the arbitral award with regards to its substance. While the Supreme Court rejected the claim for damages, its new approach can be criticised. (Judgement no. Pfv.IV.20.816/2014/11.)
- The dispute
The plaintiff of the lawsuit for damages was party to two consecutive arbitration proceedings against its contractual partner. Both proceedings concerned the shareholders’ agreement between the plaintiff and its contractual partner. The first arbitration was about the question of whether the call option right contained in the shareholders’ agreement was null and void. The arbitral award in the first arbitration declared that the option right was indeed null and void (“First Award”). Afterwards the plaintiff’s contractual partner started a new arbitration procedure against the plaintiff. In this second arbitration the main question was whether the exclusive distribution right contained in the same shareholders’ agreement was also null and void. The arbitral award in the second arbitration declared that the exclusive distribution right was in breach of the competition law provisions of the EC Treaty (“Second Award”).
The plaintiff brought a setting aside action against the Second Award, but the ordinary courts rejected the claim.
Finally, the plaintiff initiated a lawsuit for damages against three entities: (i) the institute which operates the arbitration court, (ii) the ordinary court which rejected the setting aside claim, and (iii) the Hungarian State. In its claim the plaintiff stated that the arbitration institute infringed upon a number of substantive and procedural rules, including the right to a fair trial and the principle of res judicata (the Second Award allegedly decided on the same question as the First Award). It also claimed that the court which heard the setting aside case violated directly applicable EU law rules, and that the Hungarian State is ultimately also liable for the breach of EU law by Hungarian Courts.
- Liability of the ordinary court
While in principle courts are liable for the damage they unlawfully cause, this liability is subject to a number of limitations. One of these is that the court adjudicating the damages claim against a particular court cannot review the original judgement as to its substance. Due to the principle of res judicata, the content of a final and binding judgement is immune in a subsequent damages claim brought against the court which rendered that judgement. The Supreme Court followed this approach and rejected the claim against the court which did not set aside the Second Award.
- Liability of the arbitration institution
Before this case, there was only one publicly available Supreme Court judgement dealing with the liability of an arbitration institution. In that case, the Supreme Court applied the rules of judicial liability and, in particular, the principle that arbitral awards cannot be reviewed as to their substance in a lawsuit for damages (case no. Pfv.III.21.148/2013/4.). In this case, however, the Supreme Court adopted a new approach. It said that the arbitration court’s (or institution’s) liability is based on a contract, thus the relevant question is whether there was a breach of contract. When answering this question the Supreme Court effectively reviewed the Second Award as to its merits. As a result, the Supreme Court established that the Second Award does not infringe upon the legal provisions indicated by the plaintiff.
- Liability of the Hungarian State
Finally, the Supreme Court held that Hungarian State is not liable for the alleged unlawful acts of Hungarian courts. The courts have separate legal personality and they are liable for their own conduct themselves. The Supreme Court therefore rejected the plaintiff’s claim against the Hungarian State.
The Hungarian Arbitration Act expressly states that arbitral awards have the same legal effect as final and binding judgements of ordinary courts. The Supreme Court confirmed in previous cases that arbitral awards have res judicata effect (see our previous blog entry). The Supreme Court derived from the principle of res judicata that, in a subsequent lawsuit for damages, it is prohibited to review a final and binding ordinary court judgement as to its merits. If arbitral awards also have res judicata effect, which they do, the same principle should apply in the case of damages actions brought against the arbitration institutions. One of the advantages of arbitration is that the award is immediately enforceable, no appeal lies against it and ordinary courts have very limited grounds to review arbitral awards. This basic characteristic and advantage of arbitration would be jeopardized if the losing party could have the award fully reviewed in a damages action brought against the arbitration court.