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17 November 2005
The Supreme Court has ruled that a provision in an arbitration agreement which entrusts a single party with the appointment of a substitute chairman is contrary to good morals.
An arbitrator who has been appointed after the arbitration agreement has been concluded but who withdraws from the proceedings because he lacks qualifications explicitly requested by the arbitration agreement is held to have resigned. The resignation does not render the entire arbitration clause invalid, but leads only to the arbitrator's replacement.
The applicant and an association of which the applicant is a member agreed on the following arbitration clause, included in the association's statutes:
"Potential disputes between the member and the association on the interpretation and application of this statute, especially regarding the expulsion of a member, shall be exclusively and definitively decided by an arbitral tribunal which consists of two members of the association as co-arbitrators and another member of the association appointed by them as chairman. If the two co-arbitrators fail to agree on the appointment of the chairman within seven days of the appointment of the second co-arbitrator, the chairman shall immediately be appointed by the president of the association. The provisions of Sections 577 and following of the Code of Civil Procedure apply."
In arbitration proceedings which had been pending since 1999, the applicant requested that the arbitral tribunal declare, among other things, that his expulsion from the association was invalid. In order to await the outcome of two other pending proceedings involving the applicant and relating to his claim, the arbitration was suspended in May 2000. Upon termination of these proceedings in favour of the applicant, in April 2003 the applicant asked the arbitral tribunal for an oral hearing to be held in the near future. However, as the chairman was no longer a member of the association, the chairman announced that he no longer held the necessary qualification to serve as a member of the arbitral tribunal. Given that a challenge had been filed against the co-arbitrator appointed by the applicant, and considering that the co-arbitrator appointed by the association had resigned and still needed to be replaced, the chairman observed that the arbitral tribunal was invalid and refused to act any further.
The challenge, on which no comments had yet been submitted, was filed when the arbitration was in abeyance. In addition, the association's co-arbitrator stepped down within this period. However, he was replaced at the beginning of May 2003 (ie, one month after the arbitration had been reactivated). Along with the replacement, the co-arbitrators were invited to agree on a chairman.
Two weeks prior to the replacement of the association's co-arbitrator, the applicant filed for the underlying arbitration agreement to be ruled invalid on the basis that the arbitral tribunal remained inactive (ie, one co-arbitrator had resigned, the other co-arbitrator had been challenged and the chairman remained silent).
Section 583(2)2 of the Code of Civil Procedure allows for an arbitration clause to be rendered invalid if the arbitrator nominated in an arbitration agreement, or subsequently appointed by a party or the court on the basis of such agreement, refuses to fulfil or unduly delays fulfilling the duties taken over when accepting his or her appointment.
The association opposed the application for invalidation and argued that the chairman had neither refused nor unduly delayed to fulfil his duties.
The Supreme Court considered the chairman's statement of April 2003 to constitute a complete resignation from his function due to the fact that the contractually required qualification to serve as an arbitrator in the case (ie, membership of the association) was no longer met. It ruled that, upon withdrawal, it was no longer possible to request that the underlying arbitration clause be invalidated. Invalidation can be granted only in the case of a refusal to proceed or a delay, which must be distinguished from a complete withdrawal for substantive reasons. Thus, the applicant's request for invalidation was denied.
The Supreme Court then outlined the means by which the arbitration should continue. It stated that the filing of a challenge against a co-arbitrator does not hinder the selection of a chairman and, therefore, the challenged co-arbitrator may agree on a chairman. Thereupon, the fully constituted arbitral tribunal may decide on the challenge (the respective decision may be subject to review by the courts). However, the Supreme Court noted that if the challenge is successful, the selection of the chairman would be null and void.
In addition, the Supreme Court held ex officio that the appointment of a substitute chairman exclusively by the president of the association violates the principle of fair trial pursuant to Article 6 of the European Convention on Human Rights. According to the Supreme Court, this mode of election is contrary to good morals and is thus null and void. However, only the provision that provided for the substitute appointment of the chairman exclusively by the president of the association was made null and void, affirming the validity of the rest of the arbitration clause. The Supreme Court held that the appointment of arbitrators must be equitable and ruled that, in the event that co-arbitrators are unable to agree on a chairman, the chairman should be appointed by the court.
The Supreme Court's clear vision of impartiality and the method prescribed for the appointment of an arbitral tribunal, derived from Article 6 of the European Convention on Human Rights, is much appreciated, especially in view of the Supreme Court's sometimes contentious approach to interpreting the right to be heard under the article.
Although the court's interpretation of the chairman's statement appears relatively
straightforward on the basis of the applicable law, the decision also seems
to favour arbitration as the parties' chosen method of dispute resolution.
However, if the arbitration agreement had directly provided for the chairman to be arbitrator, the loss of his qualification along with his resignation may have led to the arbitration clause being ruled invalid. Such result could be prevented only if the parties jointly prepared other solutions for the unavailability of arbitrators.
The dispositive provision of Section 583 of the Code of Civil Procedure which regulates the different cases in which an application may be made for the invalidation of an arbitration clause will not be reflected in the new Arbitration Act to be enacted at the beginning of 2006, which enter into force in July 2006. Instead, in accordance with the United Nations Commission on International Trade Law Model Law, parties will be able to request the termination of an arbitrator's function only in the event that he or she is unable to fulfil his or her duties or does not perform these within an appropriate timeframe (Section 590, draft Code of Civil Procedure).
For further information on this topic please contact Gerold Zeiler or Barbara Steindl at Schönherr Rechtsanwälte by telephone (+43 1 53 43 70) or by fax (+43 1 53 43 76100) or by email (email@example.com or firstname.lastname@example.org).
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