By Thomas Kolster, Valle-Veikko Eronen
The Finnish Supreme Court has recently granted leave to appeal in two cases relating to setting aside arbitral awards decided by the Helsinki Court of Appeal. Rulings in both cases can be expected later this year.
In the first case, the Court of Appeal rejected the party's claim that it was not given sufficient opportunity to present its case to the arbitral tribunal when the sole arbitrator had not taken into account new claims that were presented in the closing statement.
In the second case, the Court of Appeal ruled that an arbitral tribunal had exceeded its powers when deciding that a pledge of receivables had been duly perfected and was binding on the pledgor's bankruptcy estate. Consequently, the arbitral award was partially set aside by the Court of Appeal.
The case originated from a corporate transaction where the purchaser had purchased the majority of the shares in a medical staffing service company from its founder in 2008. The seller was also the managing director and chairman of the board of directors of the company. In the autumn of 2011 the Finnish authorities carried out a tax audit in the company which resulted in tax penalties of EUR 260,829.52 for the company concerning the years 2009 and 2010 with reference to alleged wilful or gross misconduct of the seller.
The purchaser initiated arbitration proceedings against the seller claiming, inter alia, damages arising from the tax penalties incurred by the company. The arbitral tribunal accepted the purchaser's claims in part and ordered the seller to pay the purchaser compensation for the punitive tax increases, additional taxes and penalty interests.
The seller filed a summons in the court seeking to set aside the arbitral award. The seller's claim was based on the fact that the arbitral tribunal had not taken into account the seller's claim regarding the quantum of the damages as it was presented for the first time in the closing statement. In the seller's view, the arbitral tribunal's decision to discard the new claims had resulted in a situation where the arbitral tribunal had not given him sufficient opportunity to present his case in accordance with Section 41 (1) (4) of the Finnish Arbitration Act.
The purchaser objected to the seller's claims and argued that, despite the fact that no cut-off date had been set by the arbitral tribunal, the seller should have presented all grounds for his objections already in the earlier stage of the arbitration proceedings. Both the district court and the court of appeal dismissed the seller's case and retained the arbitral award in force.
The Supreme Court will now consider, whether the arbitral tribunal had given the seller sufficient opportunity to present his case as referred to in Section 41 (1) (4) of the Arbitration Act.
The second case relates to the bankruptcy of the airline operator Air Finland. Air Finland had a factoring limit in place with Svea Ekonomi and the factoring limit was increased in the end of 2011 and the beginning of 2012. In connection with the increase of the factoring limit, Svea Ekonomi required security to be granted by Air Finland. Air Finland provided the requested security in the form of a guarantee issued by Air Finland's main investor.
In return of the investor issuing the guarantee to Svea Ekonomi, Air Finland pledged a receivable to the investor. The pledge agreement between the investor and Air Finland contained an arbitration clause.
Air Finland was declared bankrupt in the end of June 2012. The bankruptcy estate initiated court proceedings aiming at revocation of the pledge of the receivable granted by Air Finland to its investor. The investor, in turn, initiated arbitration proceedings and requested the arbitral tribunal, inter alia, to confirm that the pledge had been duly perfected and was binding on the bankruptcy estate.
The bankruptcy estate argued that the Bankruptcy Act's provisions were imperative, and the arbitrators did not have jurisdiction over matters relating to the bankruptcy, such as the question of whether a pledge had been duly perfected. According to the bankruptcy estate, the general court had exclusive jurisdiction, since the dispute primarily concerned the rights of the bankruptcy creditors.
Both the District Court and the Court of Appeal considered the question of whether a pledge has been duly perfected to be a question of mandatory bankruptcy law and, as a consequence, not arbitrable. Both courts decided to partially set aside the award.
The court of appeal also had to deal with the legal costs due to the award being partially set aside. As regards the administration fee and the costs of arbitral panel, these have to be challenged separately and hence the Court of Appeal stated that these would remain unaffected. As regards the liability for costs between the parties as well as for the parties' legal costs, the Court of Appeal considered that these were affected by the partial setting aside of the award and decided to set the award aside as regards the legal costs.
As the Supreme Court has granted leave to appeal, the following questions will now be dealt with by the Supreme Court:
Arbitral awards are generally enforced in Finland without the need to go through lengthy court proceedings and courts have so far been rather arbitration friendly. Enforcement of an arbitral award requires that the district court confirms it to be enforceable in summary proceedings. The matters are often dealt with rather swiftly and there have traditionally not been many appeals in such matters.
Consequently, there are not many Supreme Court precedents regarding arbitration and the treatment of arbitral awards in Finland. One given in 2016 confirmed that a company cannot be placed into bankruptcy based on an arbitral award unless a court has confirmed that the award is enforceable. Before that the last precedent regarding arbitral awards was issued in 2008.
There have only been five Supreme Court precedents dealing with arbitration and arbitral awards since 2000. Considering this history, it is quite remarkable that the Supreme Court now has two cases pending simultaneously. This can be seen to reflect the trend of arbitration being on the rise in Finland and, as a consequence, an increase in the amount of challenge proceedings.
Considering that arbitration and challenge proceedings are on the rise and the fact that publicly available case law is scarce, we look very much forward to these two new Supreme Court precedents that can be expected later this year.
The upcoming precedents will supposedly give more guidance on the arbitral tribunal's powers and the parties' opportunity to present their case, and hopefully reduce the need for challenge proceedings going forward. On the same time the outcome will inevitably have an impact on whether challenge proceedings will increase further.
We will keep a close watch on what the Supreme Court decides and provide a report and case analysis once the precedents are published.