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The European, Middle Eastern and African Arbitration Review 2016

Bulgaria

Deyan Draguiev and Assen Georgiev

CMS

19 October 2015

Bulgaria has seen a steady increase in the number of arbitral proceedings recently (both national and international arbitrations), with overall numbers for the past three years reaching more than 4,000. However, arbitration is still far from comparable to the caseload of state courts, which usually entertain between 30,000 and 35,000 business disputes per year. The average amount in dispute in international arbitration cases is approximately €500,000.

Arbitrations in Bulgaria are most often held at local arbitration institutions, such as the Arbitration Court at the Bulgarian Chamber of Industry and Commerce (BCCI) and the Arbitration Court at the Bulgarian Industrial Association, among others. Ad hoc proceedings are usually held under international contracts compared to purely domestic disputes. The most common – and oldest – venue for arbitration in Bulgaria is the Arbitration Court at the BCCI, which has handled approximately 1,300 international arbitrations in the past 10 years. Most of the institutions offer lists of arbitrators for international cases (as well as domestic ones), but these are not compulsory and parties may freely choose any other. There is a tendency for proliferation of new arbitration institutions – for instance, the Arbitration Court at CRIB (Confederation of Employers and Industrialists in Bulgaria), a member of ICC, has been recently established.

It is also important to note that, while it looks as though arbitration is on the rise, it is becoming more and more dubious as to what extent the lauded advantages of arbitration (eg, speed, cost, choice, etc) serve the interests of commercial parties and make arbitration a better choice over state courts. There has been a proliferation of arbitral institutions in Bulgaria, but newly emergent ones still seem to be far from reaching the reputation of older institutions, and this is capable of compromising the effect of arbitration as the quality of their services could become doubtful. Moreover, some of the reputable institutions would have a significant caseload, which may render the speed of the proceedings far from what is usually expected from arbitration compared to state courts. Court fees for commercial disputes before state courts amount to 4 per cent of the value of the claim, whereas, depending on the particular institution, it is possible that the costs for arbitral proceedings exceed the costs for bringing the same claim to the state court. Although arbitration is a single-instance procedure, a slower process would make the overall costs higher due to accumulation of expert witness costs and lawyers’ fees. These considerations give rise to concerns as to what extent it is still reasonable to assume that arbitration has advantages over litigation in state courts, and whether jurisdiction clauses in contracts should opt for arbitration rather than state court litigation.

It is important for contract-drafters and litigants to be aware that Bulgaria is one of the jurisdictions that seems to have a negative attitude towards unilateral arbitration clauses. It is usual for financial institutions and multinational corporations in general to insert these types of imbalanced dispute resolution clauses so that the economically stronger party has the power to decide between bringing a claim in the courts or before an arbitral tribunal. Some jurisdictions (eg, common law countries) have found nothing defective in such clauses. However, over the past several years, a number of state courts in different continental countries have invalidated such clauses on the grounds of being contrary to good faith. A recent French court judgment (Mme ‘X’ v Banque Privee Edmond de Rothschild) and a Russian court judgment (Russkaya Telephonnaya Kompaniya v Sony Ericsson Mobile Communications Rus) demonstrated a tendency against unilateral clauses. Other jurisdictions, such as China and Poland, are also known for being unfavourable towards unilateral clauses.

In 2011, the Supreme Court of Cassation, the highest Bulgarian judicial instance, issued Decision No. 71 of 2 September 2011 of the Second Commercial Chamber of the Supreme Court of Cassation under commercial case No. 1193/2010, ruling that such clauses contravene good faith under Bulgarian law. Unlike foreign unilateral clauses cases, the dispute at stake was between private individuals, not companies. Under the underlying agreement, the lender was entitled to bring a claim either before the Arbitration Court at the BCCI or other arbitration institution, or in the Sofia regional court, while the borrower was restricted to the Sofia regional court. The Supreme Court of Cassation reasoned that such a clause gives unilateral powers to the lender to make changes into the sphere of rights and obligations held by the borrower. Such powers are allowed to arise under statute but would be impermissible by way of contract. This is why the clause falls within the scope of grounds of invalidity under the Bulgarian contract law and was struck down by the Supreme Court of Cassation. There does not seem to be a settled line of case law of Bulgarian courts assuming this interpretation of unilateral clauses and it remains to be proven in future as to whether Decision No. 71 will be a one-off assault on unilateral clauses or has laid the foundations for a school of thought dealing with such clauses under Bulgarian law. However, what should be inferred from the Supreme Court of Cassation decision is that Bulgarian courts may become prone to invalidating unilateral clauses. As they have proliferated in loan agreements worldwide, this would have an impact regarding Bulgaria as a place for international arbitration and with respect to enforcement proceedings of awards issued under unilateral clauses. Banks and other multinationals should be very cautious in inserting such unilateral clauses in agreements with Bulgarian parties, regarding performance in Bulgaria or concerning Bulgaria in any way at all.

Applicable law

The legislative framework of arbitration in Bulgaria is shaped by a number of national and international instruments.

The main statute regulating the conduct of arbitration proceedings where the seat of the arbitral tribunal is in Bulgaria is the International Commercial Arbitration Act (ICAA), which closely follows the provisions of the 1985 version of the UNCITRAL Model Law on International Commercial Arbitration. The ICAA is supplemented by the general rules on civil procedure in the Civil Procedure Code (CPC).

Bulgaria is a signatory to the United Nation Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and has ratified the European Convention on International Commercial Arbitration and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. These instruments are relevant for the recognition and enforcement of foreign arbitral awards in Bulgaria.

Arbitrability of disputes

Under Bulgarian law, the arbitrability of a dispute is an absolute prerequisite for arbitration proceedings to take place and for a foreign arbitral award to be recognised and enforced in Bulgaria, which deals with the matter in an exclusive manner. It stipulates which types of disputes cannot become the subject matter of arbitration agreements, such as:

  • disputes regarding rights in real estate property or possession of real estate property;
  • disputes regarding maintenance obligations; and
  • disputes regarding employment relationships.

In addition, an arbitrable dispute should have a proprietary nature (ie, be capable of monetary valuation) or otherwise concern filling gaps in a contract or adjusting an existing contract to newly emerged circumstances. Furthermore, disputes over trademarks, patents and internal company disputes (eg, regarding decisions of corporate bodies), insolvency or competition law are not arbitrable. However, infrastructure contracts, agreements regarding natural resources, and energy or service contracts can be, and often are, subject to arbitration clauses. Arbitral tribunals are not provided with jurisdiction to decide ex aequo et bono.

If an arbitral award is submitted for enforcement in Bulgaria regarding a case per one of these categories, it would face the hurdle of article V(1) of the New York Convention.

Arbitration agreement

In its article 7, the ICAA defines the arbitration agreement as the consent of parties to confer to an arbitral tribunal the powers to settle all or some of the disputes that would arise, or have already arisen, between them regarding particular contractual or extra-contractual legal relationship. The arbitration agreement may take the form of an arbitration clause in a contract or a separate agreement between the parties. The ICAA requires that the agreement be in writing as a condition for its validity. It may be incorporated in one instrument, but it is also possible to conclude arbitration agreement by exchange of letters, telexes, telegrams and other communication methods.

The ICAA provides that the arbitration agreement may be tacitly concluded. If there is no prior arbitration agreement between the parties and one of them seizes the arbitral tribunal with request for arbitration, the other party may give consent in written form or make an explicit declaration in the course of the first arbitral hearing for acceptance of the arbitral tribunal’s jurisdiction over the matter in dispute. Moreover, participation in the arbitration proceedings without making objection to the jurisdiction of the tribunal would also be considered a valid expression of consent tantamount to conclusion of arbitration agreement.

The arbitration clause in a contract is severable from the rest of its provisions and the invalidity of the agreement incorporating an arbitration clause does not affect it.

Interrelationship between the arbitral tribunal and the state courts

As a matter of principle, arbitration proceedings should form a means of dispute settlement independent from state courts, and Bulgarian legislation indeed provides few opportunities for court reviews on the procedure before the arbitral tribunal. However, the ICAA regulates the instances where state courts may interfere with the arbitration proceedings upon application of the parties:

  • The parties to an arbitration agreement may request interim measures from the state courts for the purpose of securing the claim or any evidence relevant to it. This is possible prior to commencement of the arbitration proceedings and while they are still pending before the arbitral tribunal. As it would be outlined in section 7, a claimant would have good cause to resort to state courts for securing its claim as the arbitral tribunal has relatively limited powers in this respect.
  • If a claim that is subject to an arbitration agreement is brought before a state court, it should terminate the case but only if a party invokes it on or prior to the first arbitration hearing. If neither of the parties seeks to rely on the arbitration agreement, it is considered that they have tacitly consented to the state court’s jurisdiction to hear the particular claim brought. Irrespective of any invocation of the arbitration agreement, if the state court finds it null and void, extinguished or inoperative, the case would not be terminated and would continue.
  • Regardless of any proceedings instituted before the state court, the parties to a dispute may still refer their dispute to arbitration. The arbitration proceedings would be conducted and the award would be rendered even though there may be a case regarding the same dispute pending before state courts. Although this provision gives priority to arbitration over state courts, it is questionable as to what extent it is practical since it may seriously disrupt legal certainty having two conflicting outcomes in two parallel proceedings in different courts. The arbitrators, seized by a dispute pending before a state court, may prefer to first invite the parties to take steps to terminate their case before the state court before turning to arbitration.
  • Where one of the parties before the arbitral tribunal has requested disqualification of one or more of the arbitrators, and the request has been dismissed, it is still possible to petition before the Sofia City Court. The Sofia City Court renders a ruling on the matter that is final and cannot be appealed before other judicial instances.
  • The arbitral tribunal may request assistance from a state court in the collection of evidence relevant to the arbitration proceedings. This may also be requested by any of the parties upon prior approval by the arbitral tribunal.

The powers of state courts regarding the setting aside and enforcement of awards is reviewed below.

Constitution of the arbitral tribunal

The parties are free to select the number of arbitrators for their case. The ICAA recognises sole arbitrations as well. Where there has been no indication of election, the arbitral tribunal would be composed of three arbitrators. Parties may agree on a procedure for constitution of the tribunal or otherwise the default rules of the ICAA (articles 11–18) would be applicable. In this case, the tribunal would be made up of three arbitrators where each party appoints one of them while the selected ones choose the third, presiding member of the tribunal. The term for appointment is 30 days. If any of the parties fail to comply with this term, the other party may request an arbitrator to be appointed by the president of the BCCI. The same provision is applicable in sole arbitrations if the parties fail to agree on the sole arbitrator. The decision for appointment is final and cannot be appealed.

The arbitrators are obligated to disclose any circumstances giving rise to reasonable doubts regarding the arbitrator’s impartiality or independence, or in case the arbitrator does not possess the necessary qualification that the parties have agreed to be requisite for members of the tribunal. The obligation is effective from the time the appointment is made and extends after the constitution of the tribunal and over the course of the arbitration proceedings. The same grounds are applicable to motions for disqualification of arbitrators. If there is no agreement to the contrary, the motion for disqualification should be made no later than 15 days from constituting the tribunal or becoming aware of the circumstances giving rise to disqualification. The motion should be in writing and is submitted to the tribunal. As noted above, if the motion is dismissed, a party may request disqualification from the Sofia City Court.

The powers of the arbitrator should be terminated if the arbitrator is incapable of performing his duties, or is inactive without due cause. Where such an arbitrator does not withdraw voluntarily, or the parties fail to reach agreement on his withdrawal, any party may apply to the Sofia City Court and request termination of his powers.

Jurisdiction of the arbitral tribunal

The arbitral tribunal has the powers to rule on its own jurisdiction even in cases where the validity of the underlying arbitration agreement or clause is challenged (article 19 ICAA). The state court does not have powers in this regard.

A party may object to the jurisdiction of the tribunal no later than its reply to the statement of claim. The participation in the proceedings and appointment of an arbitrator does not preclude making such objection. The objection to the jurisdiction of the tribunal also does not preclude making any statements of defence regarding the merits of the claim. However, if the tribunal finds good cause to do so, it may admit an objection for lack of jurisdiction even at a later stage of the arbitration proceedings.

If a party requests that the tribunal make a ruling over a matter outside the jurisdiction of the tribunal, an objection for excess of authority should be made immediately by the other party.

Any party is entitled to request that the arbitral tribunal secure the claim. However, the tribunal has only a limited scope of powers regarding interim security measures. It may require that one of the parties provide security to the other to the extent of the claim but cannot secure any assets held by third parties that do not participate in the arbitral proceedings. This is why it is advisable to seek court assistance for security measures as courts have a wider jurisdiction that practically serves better the interests of claimants.

Arbitral proceedings and arbitral award

The parties are free to agree on the rules of procedure that would be applied by the tribunal. In default of such agreement, the arbitrators are free to manage the case in the manner they deem appropriate. In practical terms, if the proceedings are not ad hoc and are held at the arbitration courts of the major institutions like BCCI, the rules of procedure of the particular arbitration court would be applicable. However, for any outstanding issues, the arbitrators usually make reference and derive solutions from the CPC as a general statute on civil procedure.

The parties may also make an agreement regarding the place of arbitration or otherwise the place is appointed by the tribunal taking into account the convenience of the parties and the circumstances of the case. The parties are free to agree on the language of the proceedings as well or otherwise the language is determined by the tribunal.

The case is decided in accordance with the applicable rules as chosen by the parties. If no election is made, the tribunal makes a determination with reference to the conflict of laws rules they consider appropriate. However, the ICAA requires that in any event the tribunal should take into account the clauses of the contract between the parties (if one exists) and the commercial usages. The award is adopted by the arbitrators by a majority vote unless otherwise agreed between the parties. The dissenting arbitrator makes a separate opinion on the matter. If there is no majority, the award is rendered by the presiding arbitrator.

If the parties reach a settlement while the case is pending, the case should be terminated. They may request that the tribunal incorporates the settlement agreement in the award and thus confirm it with the award’s res judicata.

The award should stipulate the date and place of arbitration, the reasons for the award and be signed by the arbitrators. It is dispatched to both parties and considered as having entered into force as of the moment of being delivered to one of the parties.

The ICAA provides that upon motion by any party the award may be corrected, amended or supplemented regarding matters that have not been decided by the award.

Enforcement of awards and setting aside

Awards issued by tribunals seated in Bulgaria

The ICAA provides regulation regarding the setting aside and enforcement of awards that have been issued in Bulgaria (article 47). The court with jurisdiction over applications for the setting aside of awards is the Supreme Court of Cassation (the Supreme Court). The proceedings comprise one instance and the decision cannot be appealed. The grounds for setting aside are as follows:

  • if any of the parties has lacked capacity at the time of conclusion of the arbitration agreement;
  • if the arbitration agreement has not been concluded or is null and void under the law applicable chosen by the parties or, in default of choice, under the ICAA;
  • if the dispute is not arbitrable or the award contravenes the public policy of Bulgaria;
  • if any of the parties were not informed regarding the appointment of an arbitrator or the conduct of the proceedings or failed to participate in it due to reasons not attributable to it;
  • if the award resolves a dispute outside the scope he arbitration agreement; or
  • if the constitution of the arbitral tribunal and the proceedings do not comply with the arbitration agreement or the mandatory rules of the ICAA or where there is no agreement – if the rules of the ICAA have not been properly applied.

The application for setting aside should be submitted within three months from the date on which the applicant has received the award. The proceedings are bilateral (ie, the other party is allowed to submit its defence and objections). If the Supreme Court sets aside the award on grounds of incapacity, defective arbitration agreement or non-arbitrability, the dispute can be referred to be settled by the state courts. However, if the award is set aside on the rest of the grounds, the Supreme Court returns the dispute to the arbitral tribunal.

The award issued by a domestic tribunal is an executory title. The award does not have to be recognised by any of the state courts in order to be enforced. Instead, the award creditor should request from the Sofia City Court a writ of execution to be issued.

Foreign arbitral awards

Bulgaria has ratified the New York Convention, and accordingly foreign awards are being recognised and enforced on the grounds provided in the Convention. According to the Code of Private International Law (CPIL), the application for recognition and enforcement should be submitted to the Sofia City Court. The ensuing procedure is bilateral (ie, the award debtor is notified and may make objections and raises defences). The decision of the Sofia City Court on the recognition of the award is subject to appeal to the Sofia Appellate Court and ultimately to the Supreme Court. However, the grounds of appeal before the Supreme Court of Appeal are only limited to having a conflicting case law on the point of dispute, the appellate decision being contrary to Supreme Court’s case law or necessity for development of the law (article 280 CPC). In accordance with the New York Convention, the award creditor seeking enforcement of the award in Bulgaria should present the original award or a certified copy of it, along with the arbitration agreement or clause. In addition, under the CPIL, it is also necessary to present a certificate from the arbitral tribunal that the award has entered into force.

Bulgarian case law suggests that courts often want to see evidence that the award has been notified to the award-debtor before it is recognised in Bulgaria. Bulgarian courts are also ready to invoke public policy relatively often, especially when the court is not convinced that the conduct of the arbitration proceedings does not appear to be compatible with the principles of equality of parties. Bulgarian courts tend to be very formalistic on procedures such as notification of parties, ensuring opportunity to participate in the arbitration proceedings and so on, and it is very likely that if the parties have not been properly notified regarding the arbitration procedure in a manner compliant with Bulgarian law – irrespective of the place where the arbitration was held – then the Bulgarian court may refuse to enforce the award. This is why litigants expecting that the award would be submitted for enforcement in Bulgaria should be very cautious regarding the way arbitration proceedings are conducted.