Marko Hentunen Anna-Maria Palmroos March 24 2005 Supreme Court Rules on Arbitrators' Liability Castrén & Snellman | Arbitration & ADR - Finland Marko Hentunen, Anna-Maria Palmroos Arbitration & ADR BackgroundJudgmentCommentOn January 31 2005 the Finnish Supreme Court handed down a ruling (KKO 2005:14) on the principles applicable to the liability of arbitrators. The Supreme Court has not previously ruled on the issue. The Finnish Arbitration Act (967/1992) does not contain specific provisions regarding the liability of arbitrators, unlike the arbitration rules of the Board of Arbitration of the Central Chamber of Commerce of Finland, which include an exclusion of liability clause (Section 43a of the rules). Based on these rules, an arbitrator shall not be liable for any loss incurred by the parties in arbitral proceedings save for loss resulting from wilful misconduct or gross negligence. The following Supreme Court decision, however, concerns ad hoc arbitration where such limitation cannot be applied. Background The initial arbitral award was handed down in 1995. The case originally concerned a dispute arising from a share and purchase agreement between three private sellers and a company whose shares were owned by a Finnish bank. Later, other banks acted as intervening parties in the proceedings. Both the sellers and the company acted as claimants and defendants in the course of the proceedings. The arbitral tribunal consisted of three arbitrators (one appointed by each party) plus the chairman of the arbitral tribunal, appointed by the other two arbitrators.The tribunal dismissed all claims presented by the sellers and ordered them to pay compensation to the company and legal costs to the relevant banks.The sellers filed an application to declare the arbitral award null and void in the district court. This was confirmed by a final judgment of the Court of Appeals in 1997. The nullity was based on the ruling that the chairman of the arbitral tribunal was considered disqualified as both before and during the proceedings he had acted for the company, the banks and companies belonging to same group of companies by giving providing expert legal opinions. The chairman had not informed the sellers of these opinions. The fact that the opinions concerned completely different issues from the pending arbitral proceedings was considered irrelevant.Due to the nullity of the award the sellers had to recommence the arbitral proceedings. The sellers also filed a claim against the chairman demanding that he should pay them €166,729.70 plus interest as compensation for damages.JudgmentThe lower courtsBoth the district court and the Court of Appeal considered that, on the basis of Section 9 of the Arbitration Act, the chairman should have informed the sellers of the tasks that he was performing for the company and the banks in question. The chairman was not considered to be dependent on the company or the banks. However, the courts considered that as a result of the following factors, the chairman had neglected his duties under the Arbitration Act: the large number of statements given; their timing prior to the proceedings; the considerable compensation received as a result of the statements; and the importance of the arbitral proceedings. The courts considered that the compensation payable should be determined in accordance with the Tort Liability Act (412/1974), Chapter 5, Section 1 of which states that only where especially weighty reasons exist may compensation be payable for economic loss that is not connected to personal injury or damage to property.In light of previous jurisprudence and the fact that the chairman's conduct was only to be categorized as slight negligence, the court ruled that no weighty reasons existed to support recovery of the economic loss. The Court of Appeal further considered that the connection between the sellers and the arbitrators was similar to a contractual relationship, but still maintained that the damages should be evaluated based on the Tort Liability Act. Consequently, the lower courts dismissed the claim.The Supreme CourtThe Supreme Court took a different approach to the question of an arbitrator's liability.The court maintained that the sellers incurred additional legal costs because of the chairman's disqualification. However, it stressed that arbitrator's liability is triggered only in exceptional circumstances. This is necessary in order to guarantee the independence and impartiality of arbitrators. The court also ruled that the chairman should have informed the sellers of his connection to the other party and the intervening banks. The court emphasized the importance of Section 9 of the Arbitration Act, which sets out the duty to disclose any circumstances that are likely to give rise to justifiable doubts as to the arbitrator's impartiality and independence. The court stressed that this duty is not limited only to facts that could disqualify the arbitrator and considered that the threshold for the duty to disclose is low. The court further considered that a causal connection existed between the chairman's failure to provide information to the sellers and the damage caused. The court emphasized that the chairman may also have foreseen this causal relation. The court considered that had the chairman informed the sellers of the expert legal opinions he delivered to the other party and the intervening banks in accordance with Section 9 of the Arbitration Act, liability for damages would not have actualized. The sellers could have either consented to continue the proceedings or demanded that the chairman be considered disqualified. Even had the Arbitral Tribunal dismissed the claim regarding disqualification, the matter could have been assessed by a district court. The court also stated that where the claim for disqualification would have succeeded before the district court, liability for damages could not have actualized as the decision regarding the arbitrator's disqualification would have been made within the powers granted to the arbitral tribunal. The court evaluated whether there was a contractual relationship between the parties and the arbitrators as the arbitral tribunal consisted of three arbitrators. The court stated that although the parties had not appointed the chairman, they had (by agreeing to the arbitration proceedings) accepted him as being elected in accordance with the law. On this basis, the court considered that the chairman's liability was no different from the liability of the other members of the arbitral tribunal.Furthermore, the court considered that the liability of an arbitrator is not tort liability; in arbitration proceedings the parties 'purchase' the dispute resolution from the arbitrators. Thus, the relationship is comparable to a contractual relationship. The court considered that the chairman had failed to prove that the nullity of the original arbitral award and the ensuing damages were not his fault. The court added that given his education and background, the chairman should have understood that the drafting of legal opinions for the intervening banks during the arbitral proceedings against considerably high remuneration was likely to give justifiable doubts as to his impartiality and independence. The Supreme Court revoked the decisions of the lower courts. The Supreme Court ruled that the compensation payable should be based not on the Tort Liability Act but on contractual liability. The ruling remained final but the amount of compensation was returned to the district court to be decided.One of the five members of the Supreme Court gave a dissenting opinion but his conclusion was unanimous with the majority.CommentAlthough the question of the amount of damages was returned to the court of first instance, it is remarkable that the Supreme Court considered the relationship between the parties to the arbitral proceedings and the arbitrators to be comparable to a contractual relationship and named the arbitrators' liability to be based on contract rather than tort. The result is that arbitrators may be liable to pay compensation, given that economic loss is recoverable in contractual relationship. The decision is not, however, as harsh in general terms as it may seem, as the Supreme Court stressed that an arbitrator's liability may be triggered only in exceptional circumstances. Based on the decision, the importance of Section 9 of the Arbitration Act is to be emphasized. An arbitrator must immediately disclose any circumstances that are likely to give rise to justifiable doubts as to his impartiality and independence, and must inform the parties throughout the proceedings of any circumstances about which they have not been informed previously. For further information on this topic please contact Marko Hentunen or Anna-Maria Palmroos at Castrén & Snellman by telephone (+358 9 228 581) or by fax (+358 9 601 961) or by email ([email protected] or [email protected]).