Martin Hrodek and Martina Marchand
A. LEGISLATION AND RULES
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 and growing reputation – the International Arbitration Court of the Czech Commodity Exchange and the Exchange Court of Arbitration. Statutory jurisdiction of these courts is limited to disputes relating to transactions with instruments traded on these exchanges. In respect to other disputes, both courts may assist in administering ad hoc arbitrations.
B.1 Partial invalidity of arbitration clause
In the proceedings File No. 31 Cdo 3534/2019, the Czech Supreme Court (“Supreme Court”) considered a combined arbitration clause, in which the parties agreed that primarily their disputes will be dealt with by one of the three particular arbitrators to whom a claim will be submitted by any of the parties and alternatively, in the event that such a primary selection of an arbitrator fails, the arbitrator will be nominated by the creditor from the list of advocates registered with the Czech Bar Association.
Whereas the primary rule for selection of an arbitrator is valid under Czech law, the secondary rule is considered invalid since only one of the parties is entitled to select the arbitrator and, therefore, the arbitration clause lacks transparency and is contrary to section 7 of the Arbitration Act. The question before the Supreme Court was whether such combined arbitration clause may be considered as only partially invalid since it contains the primary valid rule for selection and appointment of the arbitrator. In the past, this question was dealt with differently by lower courts, and thus, a special, so-called “big senate” consisting of a higher number of judges (17 in this particular case) decided the case.
The special senate of the Supreme Court firstly referred to a general rule contained in section 41 of Act No. 89/2012 Coll., the Civil Code, as amended, which provides that if the ground for invalidity relates only to a part of the legal act, merely that part shall be invalid unless it follows from the nature of the legal act or its content or from the circumstances in which it occurred that this part cannot be separated from the other content. Moreover, it pointed out that under section 574 of the Civil Code, legal acts must be primarily seen as valid rather than invalid. The Supreme Court came to the conclusion that the alternative invalid rule for selection of an arbitrator by a creditor can be separated from the primary one since the primary rule may exist independently and prevail, which in the particular dispute was the case. In this particular case, had the parties not jointly appointed the arbitrator with the alternative rule being invalid, the arbitrator would have to be appointed by a state court.
It can be concluded that if the ground for invalidity relates only to a part of the arbitration clause that can be separated from the rest of the arbitration clause, only the part of the arbitration clause affected by the ground for invalidity is invalid. This conclusion of the Supreme Court is fully in line with the principle of party autonomy.
B.2 Breach of notification duty by the arbitrator does not lead to his/her exclusion
Proceedings File No. 23 Cdo 1337/2019 relate to an annulment of arbitration award due to a potential breach of notification duty by the presiding arbitrator. Pursuant to section 8 paragraph 1 of the Arbitration Act, an arbitrator must be excluded in case there is a reason to doubt his/her impartiality in light of his/her relationship to the case, the participants, or their representatives. Under section 8 paragraph 2 of the Arbitration Act, an arbitrator must communicate to the parties or the court without undue delay all circumstances which could raise legitimate doubts about his/her impartiality and for which he/she would be excluded as arbitrator. The plaintiff claimed that there were grounds for raising serious doubts as to the impartiality of the chairman since one month before the first hearing, the chairman informed in writing the arbitral tribunal (but not the parties to the arbitration) that the law firm in which he is practicing had provided legal services to the defendant. The chairman himself assessed the situation as moderately serious with reference to the Orange List of the IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”).
The Supreme Court emphasized that a breach of the notification duty by the arbitrator is not in itself a reason for the exclusion of the arbitrator due to lack of impartiality. If a circumstance, which was not notified, does not in itself give rise to a doubt as to the arbitrator’s impartiality and could not lead to his/her disqualification, then the arbitrator cannot be excluded on the sole ground that he/she breached the notification duty under section 8 paragraph 2 of the Arbitration Act.
The Supreme Court also dealt in detail with the question of the lack of impartiality of the arbitrator. It noted that lack of impartiality cannot be presumed, but it must be objectively proved by evidence taking. Therefore, a party claiming a lack of impartiality must prove it to the court. The Supreme Court pointed to previous case law. In proceedings File No. 23 Cdo 3150/2012, it dealt with the question of whether professional contacts and cooperation of one of the arbitrators with a legal advisor of the party when submitting proposals for joint representation of the Czech Republic in another matter could potentially lead to exclusion of the arbitrator. The Supreme Court rejected that such circumstances could raise reasonable doubts about the impartiality of the arbitrator.
It pointed out that in the case of advocates, it may be expected that in practice, they will be in standard working relations between themselves, and these contacts should not automatically lead to reasonable doubts about the impartiality of the arbitrator. In the past, the Supreme Court also addressed the issue of economic independence of the arbitrator. In its resolution, Ref. No. 20 Cdo 4022/2017 dated 23 January 2018, it came to an unequivocal conclusion that even repeated appointment of an arbitrator in the arbitration agreements does not prove a personal relationship of the arbitrator to the matter, the participants or their legal representatives. In other words, economic dependence cannot be derived merely from the fact that the arbitrator is entitled to remuneration in respect of each decided case. The Supreme Court acknowledged that reasonable doubts about the relationship between an advocate as arbitrator and another advocate representing one of the parties to arbitration could be raised if, for example, these advocates have been cooperating together for a long time in the same law firm.
Finally, the Supreme Court admitted that IBA Guidelines could be used as inspiration when deciding “similar cases.” Since the IBA Guidelines are not a source of Czech law, their application must always be measured and seen in light of the applicable Czech legislation. Nevertheless, the possibility of applying the IBA Guidelines within the limits of Czech law could lead to better predictability of judicial decision-making in the matters of exclusion of arbitrators as well as greater legal certainty for the parties to arbitration proceedings.
B.3 Absence of impartiality of the appointing authority leads to exclusion of arbitrator
On 18 November 2020, the Supreme Court issued decision File No. 23 Cdo 3972/2019 in which it assessed whether the absence of impartiality on the side of the appointing authority (i.e., the third party appointing arbitrators) leads to invalidity of the arbitration agreement. The Supreme Court concluded that the requirement of independence and impartiality of arbitrators must also apply to the appointing authority. Nevertheless, the consequence of a situation whereby the arbitrator was appointed by a third person lacking impartiality is not automatically invalidity of the arbitration agreement. It leads to exclusion of the arbitrator to hear and decide the case within the meaning of section 8 of the Arbitration Act, which may, in turn, represent a reason for annulment of the arbitration award under section 31(c) of the Arbitration Act.
In these proceedings, the Supreme Court recalled some reasons for lack of impartiality under section 8 of the Arbitration Act. According to the Supreme Court, it is most importantly the situations when the arbitrator is at the same time a party to the proceedings, witness, or he/she could be affected by the result of the proceedings. Likewise, an arbitrator is excluded if he/she has a family, friendly, or manifestly hostile relationship to the parties or a relationship of economic dependence. In this sense, the Supreme Court confirmed that the relationship of economic dependence is not given solely by a repeated nomination of the arbitrator in arbitration agreements. Thus, this conclusion should be viewed as forming a part of settled case law of the Supreme Court.