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The European, Middle Eastern and African Arbitration Review 2016

Slovakia

Since 2002, Slovakia has had fairly modern arbitration legislation based on the 1985 version of the UNCITRAL Model Law. Despite the progressive legislation, due to unpredictable – or even arbitration-hostile – courts and a few ad hoc legislative amendments, the Slovak arbitration regime remained unstable and hardly welcoming for international arbitration.

By passing a major amendment to the Arbitration Act that came into force on 1 January 2015, the Slovak government tried to revive the Slovak arbitration framework to make it more conducive for international arbitration and to bring it in line with the 2006 version of the UNCITRAL Model Law.

Two of the authors of this report, Martin Magál and Juraj Gyárfáš, were among the principal drafters of the Model Law-inspired text dealing with commercial arbitration. This report initially summarises the main obstacles to an efficient arbitration regime that existed before 2015 and then proceeds to describe the main changes that have been enacted.

Slovak arbitration law between 2002 and 2014

In 2002, a reformist Slovak government enacted an entirely new Arbitration Act that was largely based on the 1985 version of the Model Law. Due to a few important omissions and local legislative peculiarities, Slovakia was never recognised as a Model Law jurisdiction, nonetheless its legislation was fairly modern and progressive. The travaux préparatoire to the 2002 Arbitration Act clearly reveal the intent of the legislator to establish a liberal statutory regime that would foster arbitration as an alternative dispute resolution method compared with recourse to overburdened and sometimes unpredictable courts.

Unfortunately, the practical application of the arbitration framework in the course of the 2000s and early 2010s did not live up to expectations.

This was largely the result of two legal issues not directly regulated by the Model Law. The first was the definition of arbitrability in the 2002 Arbitration Act. On the one hand, the definition enabled some courts to conclude that actions for declaratory relief are not arbitrable, which made it comparatively easy for opportunistic parties to torpedo arbitral proceedings by filing actions for declaratory relief with state courts. On the other hand, consumer disputes were fully arbitrable without providing for any specific procedural safeguards to reflect the obvious differences between consumer and commercial disputes.

The second feature was a very liberal regime for institutional arbitration. In combination with the unregulated arbitrability of consumer disputes, this has led to the establishment of over 150 arbitral institutions. Many of these institutions have applied practices far removed from the professional and ethical standards of best practice in international arbitration, in particular by administering disputes involving consumer contracts in a way clearly contrary to the consumer protection rules enshrined in Slovak and EU law. In some cases, such arbitral institutions have been indirectly controlled by, or affiliated with, the firm that was referring all its disputes with consumers to such institution.

Such widespread practice has, in turn, led to a general backlash against the concept of arbitration by some Slovak courts and the legislator. When clamping down on these practices, the legislator and the courts have often failed to differentiate between consumer and commercial arbitration – and thus have introduced numerous restrictive rules that also made the legal framework for B2B arbitration less predictable.

The challenges of previous practice can be illustrated by three court decisions handed down under the old Arbitration Act. All three decisions displayed a clearly hostile stance towards arbitration by state courts and made the arbitration framework less predictable as well as being prone to opportunistic litigation tactics.

In the first case dating back to 2011, the Supreme Court1 ruled that arbitration clauses may not be incorporated by reference into the main contract.

By way of background, although the provision for formal requirements for a valid arbitration agreement in the 2002 Arbitration Act largely copied the Model Law, the section omitted to state that an arbitration agreement may also be concluded by reference to a document containing an arbitration clause (eg, general terms and conditions). The reasons for this omission are not clear, but it appears likely that this provision would have seemed superfluous as Slovak law generally recognises the incorporation of contractual terms by reference. Consequently, it could be argued that the general recognition also extends to arbitration clauses.

This has also been long-standing common practice, as arbitration clauses were often inserted in a party’s general terms and conditions and thus were incorporated into the main agreement without the document containing the general terms and conditions being separately signed.

Nevertheless, the Supreme Court has taken a different view. In a dispute between a bank and its corporate client (ie, not a consumer), the underlying loan agreement included specific reference to the bank’s general terms and conditions, and sought to incorporate those terms by reference. The general terms and conditions contained a standard arbitration clause referring all disputes to the Permanent Arbitration Court of the Slovak Banking Association.

After differing views of two lower courts, the jurisdictional question came before the Supreme Court, which held that the arbitration clause was invalid due to lack of written form because the bank’s general terms and conditions had not been separately signed by the parties.

In its opinion, the Supreme Court had not only failed to provide compelling arguments for this conclusion, it had also failed to take into account the practical implications for tens of thousands of such arbitration clauses in contracts concluded all over the country, thus rendering all of them potentially null and void.

The second issue relates to the arbitrability of actions for declaratory relief. In 2008 and 2009, two appellate courts concluded that this is not the case.2 Under the 2002 Arbitration Act, Slovak procedural law defined arbitrable matters as ‘any matters, where, given the nature of such matter, the parties can resolve a court dispute by reaching a settlement’. Traditionally, this has been interpreted as generally including any civil and commercial matters, and excluding only limited areas such as, for example, family matters, inheritance proceedings or proceedings on the legal capacity of natural persons. All other proceedings could be resolved by settlement and hence they were understood as being potentially subject to arbitration proceedings.

Overruling this view, the two appellate courts ruled that nullity of a contract applies ab initio and that the parties to a dispute cannot alter by agreement the fact of whether or not a contract is valid. Therefore, such a dispute cannot be resolved by settlement and thus cannot be submitted to arbitration. Interestingly, neither of the courts reflected on the fact that settlements in disputes for declaratory relief are commonly accepted by state courts.

Thereby, the courts potentially opened the gates to various types of torpedo actions by debtors applying for declaratory relief on the nullity of a contract containing an arbitration clause and thus opening parallel proceedings – and potentially irreconcilable decisions – against the creditor’s action for payment.

Finally, the general antipathy against arbitration also seems to have taken hold at the Slovak Constitutional Court.

By way of background, the Slovak Constitutional Court – modelled on the Federal Constitutional Court of Germany – hears complaints filed by individuals against acts of a public authority that violate fundamental rights. Given the requirement of the exhaustion of all other remedies, such a constitutional complaint is usually only available after a case has already been heard by ordinary courts. In some cases, where there is no other remedy, an administrative act can also be directly challenged before the Constitutional Court. However, in all cases, the remedy is only available against an act involving the exercise of public authority.

For several years, dissatisfied parties have been trying to make use of this remedy against arbitral awards. In 2011, the Constitutional Court opened the floodgates by ruling such complaints admissible and by setting the arbitral award aside.3

Conceptually, the ruling triggered a multitude of difficult questions. Do arbitral tribunals, in the view of the Constitutional Court, exercise public authority? How could such a complaint have been admissible, if the applicant had not first filed an application for setting aside of the award? How can the tribunal, after becoming functus officio, act as a party to proceedings before the Constitutional Court?

In other words, the Constitutional Court departed from established constitutional jurisprudence on limiting itself to reviewing acts of a public authority in order to maintain a level of control over arbitral awards.

As illustrated by these three decisions, the legal framework for arbitration in Slovakia was continuously deteriorating, thus turning Slovakia into an unpredictable and unwelcoming jurisdiction for commercial arbitration. On the consumer front, the practice of many arbitral institutions was becoming politically untenable; at the same time, it was also impossible to shift all of the consumer disputes to state courts as this would have surely overstretched the capacity of a judiciary already plagued by delays.

All of these factors gave rise to the political decision to draft a major amendment.

Background to the 2014 amendment to the Arbitration Act

In August 2012, the Ministry of Justice formed a commission of experts and instructed it to come up with a proposal for amending Slovak arbitration legislation in a way that would achieve full harmonisation of the rules on commercial arbitration with the 2006 version of the Model Law, and a clear differentiation between consumer and commercial arbitration, so that regulatory restrictions and stricter court supervision of the former would not negatively influence the latter.

The commission, composed of ministry officials, judges, academic experts and arbitration practitioners, came up with a proposal that was approved by Parliament in October 2014. Towards the end of the legislative process, the issue became quite politicised and some stakeholders argued in favour of significant restrictions – even on commercial arbitration. Ultimately, the Ministry of Justice stood firm and last-minute changes did not alter the main parts of the package.

The legislative package contained an extensive amendment to the existing Arbitration Act, as well as an entirely new Consumer ADR Act. The main objectives of the adopted changes were:

  • to provide a new and separate regulation of alternative dispute resolution methods applicable to contracts involving consumers;
  • to make the regulation of commercial arbitration in Slovakia fully harmonised with the 2006 version of the UNCITRAL Model Law; and
  • to provide a new framework for the operation of domestic arbitration institutions.

Despite a few last-minute changes in Parliament, the new legislation seems to have achieved all of the set objectives. The hope is that this modern and robust arbitration framework will be complemented by the attitude of general courts and practices of local arbitration institutions.

The most fundamental changes are summarised below.

Arbitrability

As discussed above, the definition of arbitrability has presented practical problems in the past, in particular with regard to actions for declaratory relief.

To overcome these limitations, the definition of arbitrability has been widened significantly. The previous definition referred only to matters of a proprietary nature as being arbitrable, and arbitrability depended on whether the relief sought was of a type that could be incorporated into a settlement decision validated by a Slovak court. The new definition of arbitrability removes these restrictions and essentially makes all private law relationships arbitrable, provided that they do not involve consumer contracts, rights in rem in real property, insolvency and family law issues.

The resolution for disputes involving consumer contracts was carved out from the scope of the Arbitration Act into a separate Consumer ADR Act, providing for a stricter regulatory and licensing regime. The effect of this change is that restrictive and sometimes overtly arbitration-hostile jurisprudence of some Slovak courts, aimed at the protection of consumers, will no longer apply to the recognition and enforcement of commercial arbitral awards issued under the Arbitration Act. Slovak courts will no longer be entitled to interfere with commercial arbitration proceedings or question the validity of arbitral awards on the basis of alleged misapplication of substantive law. This is one of the most welcome and significant developments in the area of arbitration in Slovakia, and one which could be inspirational to other Central and Eastern European, post-communist countries that are grappling with the issue of balancing the interests of consumers with those of commercial arbitrants.

Formal requirements for a valid arbitration agreement

The new Arbitration Act retains the condition of written form for a valid arbitration agreement. Nevertheless, the written requirement has been clarified in order to reflect modern business practice. Under the new regime, an arbitration agreement will be validly concluded if it is: contained in the exchange of the parties’ written communication; or concluded by purely electronic means.

Moreover, the amendment has in effect reversed case law, denying validity of arbitration agreements incorporated by reference into the main contract. It is now explicitly recognised (in line with the Model Law) that such incorporation may constitute a valid arbitration agreement.

The new Arbitration Act also specifically recognises the possibility to include an arbitration agreement, or an arbitration clause, in the internal corporate documents of Slovak corporations. Arguably, this would have also been possible under the old law, but given the general attitude of state courts towards arbitration, the practical enforceability of such an agreement would have been doubtful at best. The specific recognition of arbitration agreements incorporated in intra-corporate documents is a complete novelty and it will unequivocally allow for arbitrability of many corporate disputes that can arise out of a party’s engagement with certain types of corporates (particularly limited liability companies and limited partnerships). Arbitration clauses provided for in corporate documentation will also automatically become binding on new shareholders in the company without the need for a separate accession or signature.

Finally, in line with the Model Law, an arbitration agreement will also be deemed validly constituted in situations where the respondent enters an appearance by submitting a memorandum in reply without objecting to the arbitral tribunal’s jurisdiction.

Limitations on the establishment of arbitral institution

As discussed above, one of the most striking problems under the previous arbitration regime was – perhaps similar to some other central and eastern European countries – an unwelcome proliferation of arbitration institutions, many of which are either inactive or, more alarmingly, used as private law enforcement tools by certain businesses and law firms. Just before the amendment came into force, there were more than 150 so-called permanent arbitration courts in Slovakia, which have mainly been established by private companies.

Under the new regime, the only legal entities which will be allowed to establish a new permanent arbitration court are:

  • chambers of commerce;
  • non-profit professional associations; and
  • specifically named private law entities, such as the Slovak Olympic Committee.

Calls for a complete monopolisation of institutional arbitration in favour of a handful of existing institutions have not been followed. The new regime will allow for healthy competition between arbitral institutions, but will place a much greater emphasis on the transparency of their dealings and will prevent situations involving conflicts of interest from arising. Each domestic arbitral institution will be required to publish an annual report listing, in summary form, relevant information on its activities in the previous year. These will include the number of resolved and pending arbitrations, the names of persons acting as arbitrators and the fees collected by the arbitral institution from parties.

Qualification requirements for arbitrators

The amendment has abolished the onerous requirement that an arbitrator must have relevant experience to perform his function. In line with international practice, parties will be able to appoint any person, even if such person does not have previous experience as an arbitrator or a lawyer, but has other skills which the parties deem appropriate for resolving the dispute.

Further, the new legislative framework explicitly requires arbitrators to act without undue delay. Additional requirements on or duties of the arbitrators may be agreed by the parties in the arbitration agreement. The arbitrator’s duty of confidentiality has been further clarified, now specifically providing that an arbitrator owes a duty of confidentiality to all parties and not just to the party by which, or on whose behalf, the arbitrator was appointed.

New comprehensive regulation of arbitral interim measures

Before the amendment, the Arbitration Act did not provide for a comprehensive regime of arbitral interim measures. Based on a generally worded provision, arbitral tribunals were, in theory, authorised to order interim measures, but these were rarely used in practice and their enforcement was limited.

The amendment incorporates a comprehensive regulation of interim measures. An interim measure may encompass a wide range of activities and prohibitions such as, inter alia:

  • prohibiting the disposal of some assets or funds;
  • performing an action or refraining from doing so;
  • disclosing certain evidence; or
  • depositing a financial security with the arbitral tribunal.

The regulation is based on the expanded wording of article 17 et seq of the 2006 Model Law version and introduces two types of interim measure available to the parties: the standard interim measure and the ex parte interim measure.

The arbitral tribunal may grant an ex parte interim measure without prior notice to the affected party if authorised to do so in the arbitration agreement, but such measures will not be immediately enforceable by Slovak courts. Once served with the ex parte measure, the affected party will be able to file an objection with the arbitral tribunal within 15 days. If the objection is unsuccessful at the level of the arbitral tribunal, the interim measure will become a standard interim measure and, therefore, will be enforceable by courts. The affected party will be able to submit a further objection with a general court.

Standard, court-enforceable interim measures can be ordered by an arbitral tribunal, but only with prior notice to the affected party. Interim measures issued with prior notice to the affected party will be capable of court enforcement. The arbitral tribunal is also permitted to order the requesting party to provide security to the affected party which is aimed at covering any potential damages that could be caused by the interim measures.

Interim measures ordered by state courts

Under the amended Arbitration Act, the parties may ask a general court to grant interim measures before, or even during, the arbitral proceedings, but in the latter case, only before the constitution of the arbitral tribunal. The concurrent jurisdiction over interim measures therefore ends with the establishment of the arbitral tribunal, although the parties may agree otherwise. The general court retains its jurisdiction to issue interim measures against third parties that are not part of the arbitration agreement, yet some form of restraint is necessary in order to attain success in the arbitration.

Negative effect of Kompetenz-Kompetenz

The amendment to the Arbitration Act also necessitated changes to the Slovak Code of Civil Procedure, one of which reinforces the Kompetenz-Kompetenz principle by clearly recognising its ‘negative effect’ in regard to general courts. Under the new regime, a court will not be able to continue hearing a claim for invalidity, non-existence or termination of an agreement to arbitrate if the same question is pending before an arbitral tribunal. This will apply regardless of whether arbitral proceedings have been initiated before or after the general court proceedings.

Only where the arbitral tribunal has confirmed its jurisdiction in an award or preliminary ruling may the dissatisfied party challenge such decision at the general court. If, as a result of such challenge, a general court rules that an arbitrator lacks jurisdiction, the other party may lodge an appeal against such general court’s decision. No further appeal will be possible where the court confirms jurisdiction of the arbitral tribunal. This represents an intentional departure from the corresponding Model Law provision, which provides only for single instance court proceedings and is aimed at creating a pro-arbitration stance by the Slovak judiciary.

Recast of the grounds for setting aside

The grounds for the setting aside of an award are now brought fully into line with the provisions of the Model Law. These grounds mimic article V of the New York Convention. The time period for filing a motion to set aside a final award will be extended from 30 to 60 days, which is still fewer than the 90 days provided for in the Model Law. Any challenge of an award must be based strictly on procedural grounds, with no re-examination of the merits being possible.

In contrast to the old regime, the Arbitration Act specifically recognises violation of public policy as a ground for the setting aside of an award rendered in Slovakia. At the same time, however, the travaux préparatoires clearly state that the concept of public policy, as a reason for setting aside, shall be construed narrowly and given an international, rather than a domestic, meaning.

It is hoped that the introduction of the public policy ground for the setting aside of an award would pre-empt complaints against arbitral awards filed directly with the Constitutional Court (as discussed above). Arguably, any violation of constitutional rights would also constitute a violation of public policy. Since the admissibility of a constitutional complaint is subject to the exhaustion of other remedies, the fact that such award could always be challenged by means of an application for setting aside means the constitutional complaint should become inadmissible. It remains to be seen whether the Constitutional Court will use this opportunity to reverse its previous case law.

Going forward

The clear separation of commercial and consumer arbitration as well as the amendments aligning the regime for commercial arbitration with the 2006 version of the UNCITRAL Model Law certainly have the impetus to kick-start a flourishing arbitration environment. By adopting such a framework, Slovakia has sent a strong signal that it wants to be recognised as an arbitration-friendly and ‘safe’ jurisdiction. It should therefore be able to attract more interest as a place for international arbitration. However, much will depend on whether or not this clear pro-arbitration stance of the legislator will be echoed by that of the Slovak courts, which have not always demonstrated an understanding of the benefits of commercial arbitration. This remains to be seen.

Notes

  1. Ruling of the Supreme Court of the Slovak Republic, file No. 2 Cdo 245/2010, dated 30 November 2011.
  2. Ruling of the Regional Court in Nitra, file No. 26 Cob 161/2009, dated 21 December 2009. Ruling of the Regional Court in Bratislava, file No. 2 Cob 178/2008, dated 18 December 2008.
  3. Ruling of the Constitutional Court of the Slovak Republic, file No. III. ÚS 162/2011, dated 31 May 2011.