The increase in challenges of arbitral awards jeopardises arbitration as a dispute resolution mechanism

The benefits of arbitration include speed and flexibility. Arbitral awards are final, and their quick enforcement is relatively easy. Accordingly, an arbitral award cannot be set aside unless a grave procedural error has been committed. These may include errors regarding, for example, the appointment of the arbitration tribunal, bias of an arbitrator, excess of jurisdiction or failure to afford a party a sufficient opportunity to argue its case by way of disregarding the parties’ right to be heard.

Actions to set aside arbitral awards have traditionally been quite rare in Finland, but the past few years have seen a significant increase in challenges alleging that the arbitration tribunal has exceeded its jurisdiction or failed to afford a party a sufficient opportunity to argue its case by having based the arbitral award on circumstances that had not and could not have been invoked or commented on by the parties.

By virtue of the basic principles of procedural law, the Finnish Arbitration Act and its legislative history, legal literature and court praxis, a sufficient opportunity to argue one’s case has been duly afforded if the parties have been able to present their claims, grounds and evidence and to comment on the adverse party’s claims, grounds and evidence. Nothing more than that is required, and whether the parties have actually made use of the possibility to argue their case is irrelevant. The parties have the burden of allegation also in arbitration, but it only concerns legal facts (facts that are directly relevant with respect to a legal consequence; e.g., the existence of a debt relationship). By contrast, the burden of allegation does not concern evidentiary facts (facts that only have relevance as evidence concerning the existence of a legal fact; e.g., a signed promissory note) or the legal characterization of legal facts. Accordingly, grounds for annulment of an arbitral award do not, in principle, exist even if the arbitral tribunal has dealt with a theme that was not expressly invoked by either party as long as that theme was de facto discussed or covered in the process. Moreover, the principle of free evaluation of evidence applies in arbitration, and the arbitral tribunal may, to some extent, develop also its own argumentation without being bound by the parties’ arguments.

The above-referenced legal rules and principles are, in our opinion, well-grounded and justified. Arbitration as a dispute resolution mechanism would hardly function without them. They have also repeatedly been confirmed by the Supreme Court and the Courts of Appeal in judgments in which challenges have been rejected: Supreme Court of Finland 2008:77 (Polar Electro Europe B.V. v. Werfen Austria GmbH) in particular.

In light of the above, we find it surprising that the number of challenges claiming that the arbitration tribunal has exceeded its jurisdiction and failed to afford a party a sufficient opportunity to argue its case is increasing. In our experience, such lawsuits are basically attempts to overturn an arbitral award on material grounds. The losing party in the arbitration claims (incorrectly) that a procedural error has been committed if the arbitral award includes certain findings and conclusions that the parties have not expressly invoked during the process. As far as we know, such challenges have not been successful.

The increase in challenges of the above-referenced type jeopardises arbitration as a dispute resolution mechanism. The result of such challenges is that the legal uncertainties and expenses typically continue for three to five years after the rendering of the arbitral award, which was intended to be final. Contrary to the arbitration agreement, the often extensive, highly technical and ambiguous documentary material that was presented in the arbitration proceedings must be discussed again in a public court. The winning party is forced to prove in court that the grounds for the challenge are false and contrived, that the controversial circumstances and subject matter were in fact discussed or covered in the arbitration proceedings, that no procedural fault was committed and that the challenge basically results from the losing party’s dissatisfaction with the material outcome of the case.

Challenge of arbitral award is certainly an important instrument, but arbitration practitioners should reserve it for only those rare cases in which it is manifestly clear that an arbitrator had a conflict of interest or the arbitration award was, to a party’s genuine surprise, based on a legal fact which had not in any way been discussed or covered in the arbitral proceedings. It is also important for arbitrators to observe the increase of challenges and the serious risk it poses for the future of arbitration. The grounds for arbitral awards should be written in a way that makes it clear that all the circumstances and subject matters that are addressed in the arbitral award were in fact discussed or covered in the arbitration proceedings even if the parties may not have expressly invoked them.

As the Finnish Arbitration Act is likely to be amended in the coming years, we believe it is worth considering whether the amendments should prescribe that challenges to arbitral awards be processed as matters of urgency by Helsinki Court of Appeal as the court of first instance, thereby eliminating the District Court process altogether.