Overview (November 2000)

Introduction

In Finland disputes to which private law is applied can be settled by private persons (arbitrators) instead of the general courts of law. Until 1992 arbitration was regulated by the Arbitration Act of 1928, when it was replaced by a new Arbitration Act. Some provisions of the act have been drafted on the basis of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The act is relatively modern and serves the settlement of commercial disputes well.

The Arbitration Act sets strict standards for the independence and impartiality of all arbitrators, even party-nominated arbitrators, and aims at the protection of the arbitral proceedings. The role of the courts and other authorities is minimized, except in cases when supportive action is expressly requested. The control of the validity of an award and of the proceedings is limited to issues connected with the enforcement of the award. Only in certain exceptional circumstances can the courts interfere. The control of due process and fundamental legal rules is subject only to post-control by the courts in connection with enforcement.

The act is relatively detailed but leaves a number of issues open for the parties to agree on. Any issues that cannot be agreed are decided by applying other procedural rules if applicable, or rules set by the tribunal or its chairperson. Arbitration is more flexible than the rules of due process and those set by the parties themselves. The proceedings are not only private and confidential but also expedient and fair, resulting in properly motivated and predictable decisions. The costs of arbitration proceedings have sometimes been criticized for being excessive. In relation to the costs of normal court proceedings with numerous appeals, the costs of arbitration proceedings are not excessive, especially when taking into account the privacy, flexibility and expediency of the system.

In Finnish arbitration proceedings, the same rules apply whether the proceedings are domestic or international. According to the Arbitration Act, the proceedings are regarded as foreign if they are geographically located outside Finland, and as domestic if they take place in Finland. This reflects the general principle of territoriality, which is applied in a number of countries. This is particularly relevant when assessing the international competence of the national courts regarding arbitration proceedings. The first 50 sections of the act deal only with proceedings that are purely national, and the five following sections deal with the effects of foreign arbitration awards in Finland. These latter five sections oblige courts to both recognize and enforce foreign arbitration awards where possible. This is in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Finland ratified this convention in 1962.

Arbitration Agreement

Scope of application
Arbitration agreements can concern disputes to which civil and commercial law is applied, and which can be settled by agreement. This freedom of the contract is not unlimited. Disputes relating to public or criminal law, or with a significant public interest, are excluded. The parties have the right to settle the dispute they wish to submit to arbitration. It is important to remember, however, that the agreement only applies to a dispute that has already arisen, or one that may arise from certain legal relations. The agreement cannot include all disputes arising from the relationship between two parties in the future. The arbitral award based on the agreements shall also be final (eg, if the parties have reserved a right to appeal against the reward, the act is not applicable).

Written agreement
According to Section 3 of the act, an arbitration agreement must be made in writing. Formal requirements are also met if a document signed by the parties includes a reference to an arbitration clause. A valid arbitration agreement can also be formed by correspondence or other documents exchanged between the parties, including fax and e-mail.

Exclusion of courts
An action which is brought before a court shall not be heard if the defendant objects to the jurisdiction of the court prior to answering to any substantive issues of the claim on the grounds that ii can be dealt with by arbitration. Only in some cases, expressively stated in the act, can a party file its action with a court of law. These include when a party:

• refuses to submit the matter to the arbitrators;
  
  
• has not within the agreed, stipulated or legally set period of time performed his or her duties and appointed an arbitrator; or
  
  
• has not within a reasonable time paid his or her share of the advance required or given his or her share of security.

Only in extreme cases can an arbitration agreement be adjusted in favour of the weaker party.

The Arbitrators

Appointing the arbitrators
The parties are free to agree on the number of arbitrators, how they are to be elected and their qualifications. Any person with full legal capacity may act as an arbitrator. It is not necessary that he or she be a Finnish citizen. If the parties have not explicitly agreed otherwise, there shall be three arbitrators. One procedure, especially in ad hoc arbitration proceedings, is that of each party appointing one arbitrator: these in turn choose the chairperson of the tribunal. It is, however, not unusual for the parties to turn to an independent organization to appoint the arbitrators of the proceedings. In cases where a party does not nominate an arbitrator or where the parties or the arbitrators fail to reach an agreement on the appointments, there is provision made in the act for the courts to intervene in certain cases.

Disqualification
The act stipulates that an arbitrator must be impartial and independent. This is because the office is comparable with that of a judge. Under no circumstances is the arbitrator to function as an advocate or attorney of the nominating party. To secure that this requirement is met, an arbitrator is obliged to disclose any circumstances that are likely to compromise his or her impartiality or independence. If there is reasonable doubts to this, an arbitrator should not assume the duties unless the parties are aware of these and explicitly consent to his or her appointment.

There are two ways in which the parties can disqualify an arbitrator. Firstly, if the nominated party had been disqualified as a judge pursuant to Chapter 13 Section 1 of the Finnish Procedural Code. Secondly, according to the European Court of Human Rights: "Justice must not only be done, it must also be seen to be done". Thus any reason that objectively gives rise to justified doubts can also disqualify an arbitrator. The principle of fair trial also requires that the arbitrators maintain their independence and impartiality through the whole proceedings. A specific regulation allows a party to apply to a court to discharge an arbitrator when the proceedings have already begun. This is when the arbitrator cannot duly accomplish his or her duties or fails to act without undue delay. There are specific rules and time periods set forth in the act regulating the procedures of disqualifying a nominated arbitrator.

A party, who has appointed an arbitrator and informed his or her adversary of this, cannot cancel his or her own appointment without the consent of the other party. However, the parties do have the right to disqualify an arbitrator by agreement.

The Proceedings

The act does not regulate the arbitration proceedings in detail. The parties have the right to agree on these and are not bound by the Finnish Procedural Code which is observed in normal litigation. Normally the parties include a clause in the arbitration agreement referring the proceedings of their arbitration to the regulations of either a chamber of commerce or UNCITRAL. The parties can agree upon these proceedings when the dispute has already arisen. If the parties themselves do not agree on the proceedings, the arbitrators are authorized to decide for them. The act stipulates that the arbitrators must give the parties sufficient opportunity to present their case. This is part of the principle of due process.

The seat of the proceedings
The parties have the right to agree on the seat of arbitration in advance. If they fail to do this, it shall be determined by the arbitrators. The seat determines the jurisdiction and also the nationality of the proceedings, including the award, the applicable procedural law and the venue of different court proceedings. The choice of seat is of utmost importance especially in arbitration proceedings with international connections.

Language of the proceedings
The parties can agree on the language of the proceedings. The agreement does not have to be explicit but can be indirectly determined (eg, the language used in the arbitration agreement or in the business relationship). The fact that the seat of the proceedings is located in Finland does not automatically imply that the parties would have agreed upon one of Finland's official languages: Finnish or Swedish. Not even the choice of specific substantive legislation to be applied on the dispute, regulates the language of the proceedings. If the parties have not decided on a language, the arbitrators are free to decide for them. Documents can be presented in any language but must be translated into the language of the proceedings if so required by an arbitrator.

Testimony and fact finding
In order to promote an appropriate and expedient settlement, the arbitrators may ask a witness or other person to appear to give evidence. They might also ask any relevant documents or objects to be submitted as evidence. The arbitrators have a duty relating to fact finding on their own initiative but they have no right to impose any penalties or to give procedural orders to enhance the proceedings. Unless otherwise agreed by the parties, the arbitrators have the right to appoint an expert to establish facts and to give a statement on any matters relevant to the settlement of the case and the award to be given. Due to the fact that the arbitrators have no right to take testimony under oath or corresponding affirmation, a party can apply to a general court of first instance in case the arbitrators find it necessary.

Closing the proceedings
If the parties agree that the arbitration proceedings shall not be continued, or the arbitrators find that the proceedings cannot proceed for some other reason, the arbitrators shall issue an order for the termination of the arbitral proceedings. This can also to be done if the claimant withdraws his or her claim and the defendant does not request a final award.

Arbitral Award

The arbitrators can give the final award. Arbitrators may also give a partial award during the proceedings. The arbitrators may, if the parties have so agreed, separately render an interim award on any issue on which the settlement of the rest of the matter depends. All awards shall be based on law. The parties can agree if the law of a certain state should be applied to the substance of the dispute. Aside from this the parties may decide that the arbitrators can base their award on what they find reasonable (ex aeque et bono). It is important that this is only allowed if there is an express agreement by the parties on this extended mandate. A court has no right to investigate whether the law chosen has been applied correctly by the arbitrators. Only if the award is found to be contrary to the Finnish public policy is it declared null and void.

If the parties have not agreed upon the applicable substantive law and the dispute has contacts with several jurisdictions, the arbitrators should apply the law with the closest connection.

If the arbitrators disagree on the settlement of the matter, the award shall be given according to the opinion of the majority of the arbitrators. If the disagreement only concerns the amount claimed, the votes of those who adjudicate the highest amount shall be added to those who adjudicate a lower amount, until the aggregate number of votes added to each other exceeds half of all the votes. If no one opinion gains a majority vote, the award shall be rendered according to the opinion of the chairperson, unless otherwise agreed by the parties.

The award shall be made in writing, signed by all the arbitrators. A duly signed original copy of the arbitral award shall be given to each party in a hearing of the arbitrators, or it shall be delivered to them. If there is a clerical or computation error in the award, the arbitrators may on the request of a party correct it.

Enforcing the Award

A party seeking to enforce an arbitral award must file an application with a court of first instance. The matter is handled pursuant to the Act on Procedure in Petition Matters in General Court of First Instance. The court can require a Finnish or Swedish translation of the award. In principle, the court will reject the petition if it finds that the arbitral award:

• is null and void;
  
  
• has been set aside by a decision of a court; or
  
  
• on the basis of an action for declaring the arbitral award invalid or setting aside the arbitral award, may not be enforced by the court.

Once the court has given an order of enforcement, it must be conducted according to the provisions of the Execution Act, Chapter 3, Section 16.

Cost of Arbitral Proceedings

The fees of the arbitrators
The parties may agree on the sharing of the costs of the proceedings. Unless this has been done they are jointly and severally obliged to pay a fee to the arbitrators for their work and expenses. The arbitrators may confirm and order payment of a fee to each arbitrator but these fees must be reasonable, taking into consideration all relevant circumstances of the case. A party can appeal against the amount of the arbitrators fees within 60 days of the day on which he or she received a copy of the arbitral award.

The Finnish Central Chamber of Commerce drew up regulations concerning the fees of the arbitrators in August 1997. The regulations are normative and applicable in arbitration proceedings. The fees can, according to the circumstances of the case, be lower or higher than those stipulated therein. The normative fees of the arbitrators are drawn up based on the value of the dispute in question.

The costs of the parties
Concerning the parties own costs, the arbitrators may in their award order a party to partly or fully compensate the expenses incurred by the other party, unless otherwise agreed by the parties. The provisions of the Code of Procedure on Legal Expenses should be applied if necessary.

Invalidity and Setting Aside of Arbitral Awards

Invalidity
An arbitral award can, according to the act, be made either null and void or it can be set aside. According to Section 40 of the act there are four situations when the award can be declared null and void:

• if the arbitrators have decided that the matter cannot be settled by arbitration under the law of Finland. This stipulates that the arbitrators have exceeded their authority and went beyond the general scope of arbitration;
  
  
• if the award is in conflict with the public policy of Finland;
  
  
• if the award is so ambiguous or incomplete that it does not become clear what has been awarded in the matter, which relates to the enforcement of the award; and
  
  
• if the award was not made in writing or it has not been signed by the arbitrators.

Setting aside an award
The grounds providing for setting aside an award are related to the rights of the parties of the proceedings rather than material grounds of invalidity. Setting aside depends on the action of a party and can, according to the act, take place in four different circumstances:

• If the arbitrators have gone outside the scope of agreement. The authority of the arbitrators is limited by several factors and can be exceeded in several ways. The arbitrators are bound by the act, the agreement between the parties, the arbitration notice and the parties' claims;
  
  
• if an arbitrator has not been appointed in due order. This relates to the procedural provisions of the act and the agreements between the parties;
  
  
• if an arbitrator should have been disqualified but a challenge was not made in time or was not accepted. There are several reasons why an arbitrator that should have been disqualified but was not. The reason for disqualification is of little importance as long as the impartiality and independence of the arbitrators is not affected; or
  
  
• if the arbitrators have not given either party a sufficient opportunity to present its case. This is based on the act's rigorous demand on due process. It is essential that the party has been offered an opportunity to plead its case. If, however, the party had such an opportunity but chose not to accept it, this cannot be blamed on the arbitrators.

For further information on this topic please contact Jouko Huhtala or Marten Janson at Castren & Snellman by telephone (+358 9 2285 8331) or by fax (+358 9 655 919) or by e-mail ([email protected] or [email protected]).

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