In November 2020 the Supreme Court issued a decision significantly affecting the review of arbitration clauses by the Czech courts. The court touched on situations when an arbitration clause leaves the appointment of arbitrators to an independent appointing authority (private arbitration centres).(1)
The case concerned an arbitration clause which stated that all disputes arising from the contract would be resolved by a single arbitrator appointed by the agent of a specified limited liability company. The first-instance court nevertheless refused to refer to arbitration a dispute based on the underlying contract, stating that appointing authorities such as private arbitration centres cannot be considered independent. Unlike permanent arbitration courts, these centres organise arbitration hearings ad hoc and receive an economic benefit for doing so. They appoint the same persons as arbitrators, based on long-term relationships, and have ties to businesspeople who, in exchange, include said appointing authorities in their business contracts' arbitration clauses. This ruling was confirmed by the appellate court.
One of the parties challenged this finding for various reasons, including the fact that the Arbitration Act does not regulate the independence of appointing authorities, but merely of arbitrators. In any event, the court failed to investigate the specific circumstances of the case that showed the appointing authority's alleged lack of independence. The existence of factors showing the appointment of an arbitrator by a person lacking impartiality cannot lead to the invalidity of the arbitration clause, but merely to the exclusion of the arbitrator. Moreover, parties are entitled to select the appointing authority based on their free contractual will, which is one of the leading principles of the new Civil Code 2014 (which replaced the last remnants of the civil code from the socialist era, to emphasise a shift towards parties' freedom of choice).
The possibility of third persons appointing arbitrators was introduced to the Czech Arbitration Act in April 2012. Previously, arbitration clauses had to specify the number and identity of arbitrators or the means of their appointment. Nevertheless, the Czech courts were liberal and permitted the use of appointing authorities in arbitration clauses. This changed in 2009 when the Prague High Court held that unless the appointing authority was also a permanent arbitration court, such a clause would circumvent the law and thus be invalid. These conclusions also applied to natural persons serving on such appointing authorities. This restrictive approach was adopted to protect consumers from misuse of arbitration through a lack of transparency in the selection of arbitrators, often in connection with consumer loan contracts.
This changed when the Arbitration Act was amended in April 2012. Since then, Section 7 of the act has explicitly permitted the appointment of arbitrators by appointing authorities. This applies to all situations, apart from consumer disputes, where arbitration clauses are generally prohibited by law.
Lack of independence based on particular circumstances
The Supreme Court first responded to some of the plaintiff's allegations. The court confirmed that requirements of independence and impartiality apply to appointing authorities, not just to arbitrators. However, it reiterated its previous findings that multiple inclusions of the same names in arbitration clauses do not themselves prove a lack of independence. A lack of independence would exist only if there was a personal relationship to the matter, the participants or their legal representatives. An arbitrator's economic reliance is constituted not by multiple appointments but rather by being an employee or business partner of one of the parties to the dispute. Therefore, the court held that an appointing authority's lack of independence must similarly be proven by the existence of particular circumstances. The Arbitration Act provides parties with sufficient means to challenge an arbitrator who is not independent, among other things, thanks to obligatory notifications by arbitrators in circumstances which raise a suspicion of a lack of independence. In the case at hand, the lower courts did not evaluate any particular evidence of the alleged lack of independence but merely presumed it based on the appointing authority's inclusion in the arbitration clause. This applies to all arbitration clauses mentioning appointing authorities concluded after the entry into force of the new Civil Code (1 January 2014).
In any event, a lack of independence of an appointing authority or arbitrator cannot result in the invalidity of the arbitration clause, but rather the exclusion of the arbitrator.
The Supreme Court's decision may facilitate more frequent use of appointing authorities in arbitration clauses in the Czech Republic. Arbitration clauses concluded after 1 January 2014 and containing references to appointing authorities are not invalid per se. Instead, each case requires careful consideration of the circumstances allegedly showing a lack of independence from the appointing authority.
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