setting aside

Hungarian Supreme Court sets aside an arbitral award

In a recent judgement the Hungarian Supreme Court set aside an arbitral award on the basis that the arbitral tribunal failed to decide on the whole claim, and thereby the arbitral procedure was not in accordance with the agreement of the parties (Case no. BH 2015.167).

 When an ordinary court sets aside an arbitral award, this is always worth noting and reporting. Such cases are exceptional because the grounds for setting aside arbitral awards are limited, in most of the cases the conditions for setting aside are not fulfilled, and Hungarian courts generally follow a liberal, pro-arbitration approach. Under Hungarian law the grounds for setting aside correspond to Art. V of the New York Convention. One of these grounds is if the arbitral procedure was not in accordance with the agreement of the parties. In a recent judgement the Hungarian Supreme Court set aside a domestic arbitral award based on this ground. Since the legal basis of the domestic decision (Section 55(1)(e) of the Hungarian Arbitration Act), corresponds to Art. V(1)(d) of the New York Convention, applicable in case of recognition and enforcement of foreign arbitral awards, the case is relevant for both domestic and international arbitration.

  1. The case

The case concerned an arbitration before the Permanent Court of Arbitration of the Money and Capital Markets. The dispute originated from a credit agreement which was terminated by the creditor. The debtor contested the termination and alleged that it suffered damages in the magnitude of HUF 13 billion plus EUR 42 million as a result of the allegedly unlawful termination. The debtor initiated arbitration proceedings against the creditor and claimed damages, however, the amount of its claim was only HUF 1.98 billion (about 7% of its alleged full loss), and it reserved its rights to claim further damages. According to the claimant its total loss consisted of four different heads of losses, it nevertheless failed to specify, despite the arbitral tribunal’s repeated requests, which heads of losses did his claim of HUF 1.98 billion cover.

  1. The arbitral award

In its award the arbitral tribunal rejected the claim. In the award’s reasoning, the arbitral tribunal considered that the claim corresponded to two heads of losses the aggregate amount of which was HUF 1.92 billion. Since this amount is slightly lower than the amount claimed (HUF 1.98 billion), the arbitral tribunal ordered that the advance on arbitration costs paid for the difference (HUF 0.06 billion) shall be transferred back to the claimant.

  1. The Supreme Court’s decision

The Hungarian Supreme Court set aside the arbitral award. The Supreme Court found that the arbitral award’s operative part and its reasoning were contradictory. In the operative part the award rejected the claim entirely, while it was clear from the reasoning that the award does not cover the whole claim because the tribunal did not decide on the amount of HUF 0.06 billion but rather ordered the refunding of the corresponding advance on costs. Therefore it is impossible to determine the scope of the arbitral award’s res iudicata effect. The Supreme Court referred to its previous judgement according to which the res iudicata effect of arbitral awards is a part of Hungarian public policy. According to the Procedural Rules of the Permanent Court of Arbitration of the Money and Capital Markets the arbitration is concluded with either an award or an order terminating the proceedings. Thus, the arbitral tribunal should have issued an order terminating the proceedings with respect to that part of the claim which it did not decide upon (HUF 0.06 billion). The tribunal failed to do so, consequently the arbitral procedure was not in accordance with the agreement of the parties.

The Supreme Court emphasized that it does not have the right to overrule the arbitral tribunal’s decision as to what is the amount and the legal basis of the claim. Thus, it did not investigate whether the tribunal was correct in stating that the claim covered two specific heads of losses. The Supreme Court’s only concern was that the arbitral tribunal failed to properly close the case based on its own Procedural Rules (issuing an award on the merits, issuing a termination order about the remaining part of the claim).

The Supreme Court rejected the setting aside claim based on the alleged lack of impartiality of one of the arbitrators. The claimant’s allegation was based on the fact that one of the arbitrators was member of the Arbitration Court’s Board of Directors where another board member, who did not act either as an arbitrator or counsel in the arbitration, but worked in the same law firm as the respondent’s counsel in the arbitration.

  1. Comments

While it is a rare occasion when the Supreme Court sets aside an arbitral award, the court’s decision seems to be justified. The court’s approach remained within the strict limits of reviewing arbitral awards. Under Hungarian law, if the conditions for setting aside are fulfilled, the only decision the court can make is to set aside (annul) the arbitral award. This rule applies even if, as in this case, the reason for setting aside is that the arbitral tribunal failed to render an additional order. Finally, it is reassuring that the Supreme Court confirmed the ordinary courts’ prohibition to overrule the merits of the arbitral award.