Marko Hentunen Jouko Huhtala Marcus Möller March 11 2004 Validity of Arbitration Clauses Castrén & Snellman | Arbitration & ADR - Finland Marko Hentunen, Jouko Huhtala, Marcus Möller Arbitration & ADR Background 1996 Judgment 2003 Judgment Comment Background Under Section 5 of the Finnish Arbitration Act (967/1992), arbitration clauses supersede the jurisdiction of an ordinary court. An arbitration clause can only be adjusted in its scope or set aside by a court where the contract is unreasonable or its application would lead to an unreasonable result. In practice the adjustment or setting aside of arbitration clauses is extremely rare, but such rulings can lead to a dispute being settled by a court of general jurisdiction, usually a district court. The case law on the adjustment or setting aside of arbitration clauses is quite limited and there is thus some uncertainty regarding the circumstances under which a clause can be adjusted or set aside (see "Courts Set Aside Arbitration Clause"). Two relevant judgments have been given by the Supreme Court to date, one in 1996 and another in 2003. 1996 Judgment In 1996 the Supreme Court issued its first judgment on the adjustment or setting aside of an arbitration clause. The plaintiff, a retailer suing a company that operated a chain of small convenience stores to which the retailer had previously belonged, had claimed damages for unjustified termination of the chain agreement. The defendant invoked an arbitration clause that had been included in the franchise agreement and claimed that general courts had no jurisdiction over the dispute.In its judgment the court noted that the franchise agreement between the plaintiff and the defendant was between two business parties, as opposed to a business party and a consumer, and that Finnish legislation places no general restriction or prohibition on arbitration clauses in contractual relations between business parties. However, the court noted that the rule on the equitable adjustment or setting aside of contracts did apply. The court held that this meant an arbitration clause could be adjusted or set aside if application of the clause would impair a party's access to justice. According to the court, this may be the case if one party is in a weaker position (equivalent to an employee or a consumer) than the other, or if the dispute at hand is simple and of minor economic significance, so that the cost of arbitration proceedings is unreasonable given the context.Though the agreement was held to be a commercial agreement between business parties, the court stated that the plaintiff could probably not have affected the terms of the agreement and thus had been forced to accept the draft offered by the defendant. However, the court noted that an arbitration clause is not an unusual provision in a commercial agreement. The plaintiff had been given the opportunity to familiarize herself with the agreement for a week prior to its signing and had access to legal expertise while deciding whether to enter into the agreement. The plaintiff had also been employed by an employer other than the defendant and was financially independent of the defendant, and thus free to decide whether to agree to the proposed terms. On these grounds the court held that the arbitration clause itself could not be deemed unreasonable.The court stated that the scope of the plaintiff's operations was not minor and that these operations were too independent for the plaintiff to have occupied a position equivalent to an employee or a consumer. Further, the court noted that the plaintiff had claimed that she had not received sufficient information regarding profitability, probable earnings and other operational circumstances, and that she had had to bear the losses of initial investment in and costs of a security arrangement demanded by the defendant. According to the court, this claim was not of minor economic significance, it was not simple and settlement of such disputes in arbitration is not unusual. On these grounds the court held that the settlement of the dispute in arbitration could not be deemed unreasonable for the plaintiff. 2003 JudgmentIn the 2003 case the plaintiff was an investment firm suing one of its private clients to recover an undisputed debt. The defendant made a counterclaim for damages of the same amount as the original claim. The investment firm argued that the counterclaim should be dismissed as the dispute concerned an agreement that included an arbitration clause providing for proceedings before a sole arbitrator. The defendant petitioned for this clause to be set aside, claiming that his insolvency made the clause unreasonable and that he was financially unable to get the matter tried in arbitration.The Supreme Court noted that, according to the Arbitration Act, parties are jointly and severally liable for compensating an arbitrator for his work and expenses unless agreed otherwise, and that the parties in this case had not so agreed. The court further noted that an arbitrator has the right to require the parties to provide an advance payment or security deposit for the arbitrator's fees and expenses, and that if this is not paid in its entirety by the parties, together or individually, the case will usually be stayed or dismissed.The court found that the defendant had neither assets nor income, and thus could not meet the advance or security likely to be required by an arbitrator. As the plaintiff did not claim to be prepared to pay the defendant's share of an advance payment or to submit a security deposit on the defendant's behalf, the court ruled that it was likely the defendant would be unable to have his claim tried in arbitration. The court noted that the defendant had previously been awarded cost-free legal proceedings and had ordered legal counsel before general courts, and that such benefits could not be awarded in arbitration. Further, the court found that the defendant could not look after his interests and rights in arbitration without skilled professional counsel, and that he had no prospect of covering the costs of such counsel. On these grounds, the court held that application of the arbitration clause would lead to an unreasonable result and set aside the arbitration clause. The case was thus referred back to the district court that had originally tried the case. Comment The 2003 case does not represent a change in the adjustment rule first applied by the Supreme Court in the 1996 case - the rule applied in both cases was the same, though the merits of the cases differed. The 2003 case does not demonstrate a more lenient view to the adjustment of arbitration clauses. The rule remains that arbitration clauses in agreements between business parties should be adjusted or set aside only in exceptional circumstances. Only if the weaker party is in a position equivalent to that of an employee or a consumer can an arbitration clause be adjusted or set aside. In common commercial agreements where the parties are corporate entities, the adjustment or setting aside of an arbitration clause is highly unlikely. For further information on this topic please contact Jouko Huhtala or Marko Hentunen or Marcus Möller at Castrén & Snellman by telephone (+358 9 228 581) or by fax (+358 9 601 961) or by email ([email protected] or [email protected] or [email protected]).