Unforeseeability of an Arbitral Award as Grounds for Its Annulment by the Courts

Given the nature of an arbitral award as a decision on the merits that is both first-instance and final, and against which no appeal lies, the question arises whether there is any way of resisting such a surprising decision.

Act No. 216/1994 Coll., on Arbitration and the Enforcement of Arbitral Awards, as amended (the "Arbitration Act"), empowers the ordinary courts to set aside an arbitral award on the application of a party to the arbitration. The grounds for setting an award aside are set out exhaustively in Section 31 of the Arbitration Act and rest, by and large, on procedural defects committed by the arbitral tribunal in the course of the proceedings. The unforeseeability of the tribunal's conduct of the proceedings falls within the ground for annulment set out in subparagraph (e) of that provision. Where a party cannot anticipate the tribunal's further steps, and the tribunal does not tell the party that it takes a view of the case different from the one apparent from the evidence adduced so far, the party is denied any proper opportunity to defend its assertions or to supplement the evidence so as to substantiate its own case rather than that of its opponent. Foreseeability on the arbitrator's part also depends on the duty to give guidance, which is indeed one of the principal instruments through which cooperation between the tribunal on the one hand and the parties on the other is realised. In arbitration, that duty follows from the Code of Civil Procedure, which under Section 30 of the Arbitration Act applies mutatis mutandis to arbitral proceedings.

Under the Code of Civil Procedure, a civil court - and, by virtue of the above, an arbitral tribunal too - owes a duty to give guidance in the course of the proceedings (Section 118a) and before the hearing is concluded (Section 119a). An arbitral tribunal acts procedurally incorrectly where it closes the taking of evidence and decides the merits without having given the parties proper guidance. The impossibility of lodging an ordinary appeal, inherent by its nature in arbitration, curtails the party's procedural rights to a certain extent, which in the end - once the award has been made and has become final - is felt in substantive terms as well.

The question whether guidance must be given to the parties in arbitration has also been addressed by the Nejvyssi soud CR (Supreme Court of the Czech Republic), which, in common with the Ustavni soud CR (Constitutional Court of the Czech Republic), held that one of the conditions of a foreseeable decision - including a decision of an arbitral tribunal or a sole arbitrator - is compliance with the duty to give guidance under Sections 118a and 119a of the Code of Civil Procedure. That duty matters all the more where one of the parties has failed to prove its assertions, or rather has not adduced evidence relevant to them. One such decision is the judgment of the Constitutional Court of 8 March 2011, Case No. I. US 3227/07, in which the Court examined precisely the connection between the foreseeability of an arbitrator's conduct of the proceedings and a possible breach of the equality of the parties and equality of arms enshrined in Section 18 of the Arbitration Act. In that judgment the Constitutional Court stated, among other things, that:

"A party may be deprived of the full opportunity to assert its rights also by unforeseeable conduct on the part of the arbitrator, as a result of which the party will be unable, for example, to comment on all relevant facts, or to supplement its assertions with facts which it did not consider material from the standpoint of its own legal view but which are relevant from the standpoint of the legal view taken by the arbitrator, and to propose evidence to prove them. Excluding unforeseeability in arbitral decision-making is all the more pressing because arbitration is in principle a single-instance procedure (see Section 27 of the Arbitration Act), which prevents the parties from responding, at least subsequently, to a surprising legal view. An arbitrator cannot be a merely passive figure; by the manner in which the proceedings are conducted, the arbitrator must ensure that the decision does not come as a surprise. In civil court proceedings that objective is pursued through the court's duty to give guidance; there is no reason why an arbitrator, who in arbitration performs the role of the adjudicating body in place of a court, should not owe the same duty. An arbitrator's duty to give guidance is not at odds with the nature of arbitration; put differently, not even the specific features of arbitration can support the conclusion that an arbitrator need not have regard to the foreseeability of his decision-making."

The Constitutional Court underlines the need for foreseeability in arbitration notwithstanding the features that set it markedly apart from proceedings before a civil court, and rests its view on the proposition that there is no reason why an arbitrator should be relieved of the requirement of foreseeable decision-making when the arbitrator performs the role of the adjudicating body in place of a court. Conduct by which an arbitrator denies the parties the opportunity to comment on all relevant facts breaches both the equality of the parties and the foreseeability of the decision; and where the arbitrator regards facts other than those advanced by one or both parties as relevant, the parties must be given the opportunity to comment on those facts too and to propose evidence in support of them.

It must nevertheless be borne in mind that guidance given to the parties under Section 118a of the Code of Civil Procedure in purely formal terms curtails a party's rights just as much as guidance withheld altogether. Proper compliance with the duty therefore calls for sufficient specificity as to which of the parties' assertions the tribunal does not regard as proved or as relevant. Where the tribunal fails to alert the parties to the direction in which they should supplement their assertions, and thereby denies them the opportunity to develop their argument in the "right" direction and to adduce evidence proving such assertions, it fails to discharge its duty to give guidance and gravely infringes their procedural rights. The unforeseeability of an arbitral tribunal's procedural conduct was also addressed by the Supreme Court in its judgment of 18 December 2013, Case No. 32 Cdo 4968/2010, in which it held:

"Procedural conduct on the part of an arbitrator by which a party to the arbitration was taken by surprise and, in material terms, deprived of the opportunity to adduce evidence proving its assertions certainly does not meet the requirement laid down in the mandatory provision of Section 18 of the Arbitration Act."

An arbitral tribunal denies a party the opportunity to defend its rights in the arbitration where it does not regard the evidence adduced by that party as relevant, gives the party no warning whatever of that fact, and the party first learns of that irrelevance from the reasoning of the award.

Section 118a of the Code of Civil Procedure, in which the duty to give guidance is enshrined, reads as follows:

(1) Where it emerges in the course of a hearing that a party has not set out all the decisive facts or has set them out incompletely, the presiding judge shall invite the party to supplement its assertions and shall advise it what those assertions are to be supplemented with and what the consequences of failing to comply with that invitation would be.

(2) Where the presiding judge considers that the case may be assessed in law otherwise than in accordance with the party's legal view, he shall invite the party to supplement its account of the decisive facts to the necessary extent, proceeding by analogy with subsection (1).

(3) Where the presiding judge ascertains in the course of a hearing that a party has not yet proposed the evidence needed to prove all of its contested assertions, he shall invite the party to identify that evidence without undue delay and shall advise it of the consequences of failing to comply with that invitation.

(4) ....

Building on the case law set out above, it may be concluded that the duty to give guidance in arbitration reflects the need to establish the facts fully, so that a decision founded upon them may be made. Section 118a of the Code of Civil Procedure is intended to guarantee foreseeable judicial decision-making in every case, including cases in which the court, or the arbitrator, takes a legal view different from that of the parties themselves. The duty also serves, among other things, to preserve the principle of procedural economy and to prevent needless delays caused by a succession of applications by the parties. Not least, it reflects the role of the judge, or the arbitrator, who must conduct the proceedings so that the facts relevant to the decision are established.

Before a court can give a decision it must characterise the case in law. Applying a particular rule of law to the parties' assertions requires the facts to be established and the legally relevant facts to be isolated, on the basis of which the court then makes its legal characterisation. It is the judge - and, by analogy, the arbitral tribunal - who must steer the parties towards proving precisely those facts that are material to the decision. Only where a party fails, despite having been given guidance, to state all the decisive factual assertions may the court conclude that the party has not discharged its burden of proof.

"The court advises a party that evidence must be identified to prove a particular fact only where the party asserts that fact at all." 1

Where an arbitral tribunal deals with all the evidence it considers immaterial by merely stating in the reasons for the award that it is irrelevant, without having given the party guidance in the course of the proceedings and drawn attention to its differing view of the case, it denies the party the opportunity to support its assertions with other evidence that the tribunal would regard as relevant.

"A legal view of the judge differing from that of a party must be made accessible to the parties at the level of the duty to assert and the duty to prove, by means of specific guidance. The judge must explain to the party that the guidance is given in view of a possible different legal characterisation, identify the legally material fact whose assertion is presupposed by the elements of the rule the judge is contemplating, and invite the party to state its factual version of that legally material fact and to identify evidence (if it has not already done so) to prove it." 2

Arbitral proceedings suffer from a procedural defect where the tribunal does not invite a party to supplement its assertions, does not advise it in what respect they are to be supplemented, and does not advise it of the procedural consequences of failing to do so. The same applies to the situation contemplated by Section 118a(3) in relation to the parties' duty to adduce evidence proving their assertions. Where a party has proposed evidence which the court considers wholly incapable of proving the assertions in question, it must advise the party accordingly.

"That duty to give guidance also applies to cases in which a party proposed evidence, nothing was ascertained by means of that evidence, and the party would lose the dispute on that account (having failed to discharge the burden of proof). In such a case the party must be advised under Section 118a(3) to identify the necessary evidence." 3

1. BUREŠ, DRÁPAL, KRČMÁŘ, MAZANEC, DLOUHÁ, FIALA, HOLEJŠOVSKÝ: Občanský soudní řád, 7th edition, 2006, p. 548.
2. Ibid., pp. 548-549.
3. Ibid., p. 549.