SETTING ASIDE ARBITRAL AWARDS IN HUNGARY ON PROCEDURAL GROUNDS

15 February 2019

What is the standard of review of Hungarian state Courts, when arbitral awards are challenged on the basis of procedural grounds? What are the most frequently invoked procedural faults? We address these question in our article.

Grounds for setting aside

The Hungarian Arbitration Act mirrors the grounds for setting aside of arbitral awards, as defined by the UNCITRAL Model Law, which can be summarized as follows:

1. non-existent or invalid arbitration agreement;
2. denial of opportunity to present case;
3. excess of authority by the arbitral tribunal;
4. failure to comply with procedural rules;
5. non-arbitrability;
6. public order;

In the framework of this article we shortly present the case law of Hungarian Courts in relation with the grounds under points b)-d). The common characteristic of these grounds is that the party wishing to annul the award invokes a major procedural fault made by the arbitral tribunal during the arbitration procedure.

Typical procedural faults

Among the 3 procedural grounds mentioned above, the denial of opportunity to present a case is the most frequently invoked in Hungary, probably because it is the easiest to be interpreted broadly.

This ground is mostly invoked together with the other 2 procedural faults, namely the excess of authority and breach of procedural rules by the arbitral tribunal, therefore we discuss these three grounds for setting aside together.

Based on case law of the last decade, Hungarian state courts annulled arbitral awards on the basis of procedural faults

• when the arbitral tribunal based its decision on factual and legal grounds which were not included in the claim[1] or
• when the tribunal made decision on a claim in respect of which the parties could not express their standpoints;[2]
• when the statement of claim was not properly sent to respondent, who could not participate in the proceedings.[3]
• when the arbitral tribunal failed to inform the parties about its opinion regarding invalidity, who therefore could not submit their motions for evidence[4].

At the same time, as a notable exception, it was held that the party cannot complain that he was denied of the opportunity to present its case in the dispute, when the arbitral tribunal disregarded his motions for evidence.[5]

Example for parochial approach

Sometimes the strictness of state courts goes too far when it comes to procedural faults during arbitration.

In a memorable case the state court annulled the arbitral award on the basis, that despite the provision of the rules of procedures of the Arbitration Court attached to the Hungarian Chamber of Commerce, the arbitral tribunal has not rendered the award in a “closed session” with the concurrent presence of the three arbitrators which would allowed them to discuss the arguments in details[6].

The above judgment, which shows a parochial approach of the judges, received strong criticism from arbitration practitioners. After this judgment, the above arbitral institution changed its rules of procedure by leaving the “closed session’ requirement out from the rules relating to the making of the arbitral award.

Summary

Hungarian state courts tend to be strict when it comes to reviewing an arbitral award on the basis of procedural faults. While in most cases this strictness is understandable to protect the parties’ in a commercial arbitration equally, sometimes they go beyond the reasonable standard of review, which sometimes can lead to the triumph of form over the substance.