Traditionally, arbitration has been viewed as a quicker, less expensive and more discreet way of solving conflicts compared to litigation.
Whilst this is still partly true, there is growing concern, both in Finland and in the wider international community, that arbitration is becoming more like litigation. Parties to arbitration are starting to use procedures which are more normally associated with litigation. For example, requests for disclosure are increasing, as are the number of challenges to final rendered awards.
These developments tend to both increase legal costs and hinder the effective execution of arbitration awards and therefore diminish the advantages of arbitration versus litigation as a method of dispute resolution.
Ways to dispute a rendered arbitration award
Under Finnish law, an arbitration award is final and binding upon the parties. The only possibility to challenge the award is by initiating annulment proceedings or by disputing the execution of the award based on certain formal grounds as defined in sections 40 to 45 of the Finnish Arbitration Act (967/92) (the "Act").
According to section 40 of the Act, an arbitration award is null and void if:
i. the arbitrators have ruled on an issue which according to Finnish law is not arbitrable;
ii. the award contradicts fundamental principles of the Finnish legal system (ordre public);
iii. the award is so unclear that the order contained within it cannot be determined; or
iv. the award has not been issued in writing or has not been signed by the arbitrators.
According to section 41 of the Act, an arbitration award may be annulled if:
i. the arbitrators have exceeded their powers;
ii. the arbitrators have not been appointed in accordance with the Act;
iii. the arbitrators have a conflict of interest; and/or
iv. the arbitrators have not given a party sufficient opportunity to present its case.
Crucially, awards are automatically null and void if they fall under section 40, whereas section 41 provides the court with a discretion to nullify an award. A challenge of an award under section 41 must be filed within three months from the receipt of a copy of the arbitral award. In contrast, section 40 does not impose such a deadline. By challenging an award, a party can at the very least delay the enforcement of such award.
In order to enforce an arbitral award, a party must apply this to the local District Court. Once the District Court has ordered the enforcement of the award, this will be carried out by the enforcement authorities as with any type of final verdict.
Practical application of the law
The Finnish Supreme Court rarely needs to consider claims under section 40 of the Act. Since the Act entered into force in 1992, there have been only a few decisions regarding arbitration issues and only one recent decision (KKO 2008:77) concerning the annulment of an arbitral award. Of the handful of cases which have reached the appellate courts, very few awards have been nullified.
In KKO 2008:77, the dispute centred around a distribution agreement between the parties, which contained a clause stating that the distributor was not allowed any compensation upon termination of the distribution agreement. The distributor commenced arbitration proceedings seeking that this clause be declared null and void on account of legislation in Finland and Austria.
The Tribunal rejected the claimant's arguments in part and found the clause to be valid. Nevertheless, the Tribunal ordered the defendant to pay compensation based on the fact that the application of the clause would be unreasonable to the distributor. The defendant appealed this decision on the basis that the claimant had not asked for or referred to this alternative form of relief during the arbitration proceedings. As such, the defendant claimed it had not had opportunity to argue its case properly.
On appeal, by a narrow majority (3:2) the Supreme Court voted to reject the appeal and upheld the arbitration award. The Supreme Court accepted that arbitrators had acted properly in taking into account circumstances and arguments which the parties had not directly referred to in their cases. According to the court, by entering into arbitration over the validity of the distribution agreement clause, both the claimant and the defendant had accepted that the arbitrators could take an equitable approach in reaching their decision. As such, the "compromise" outcome reached by the tribunal could not be said to be a surprise to the defendant. The defendant was deemed to have had sufficient opportunity to respond to any issues of fairness during the initial tribunal hearing, as these issues also arose in response to the claimant's stated case that the clause be declared null and void.
It is difficult to foresee the effects of this decision on arbitration issues in Finland. Some experts consider that the Supreme Court was quite liberal when upholding the award and allowing this much freedom for the tribunal to interpret the parties' intentions. On the other hand, the decision suggests that the threshold to annul arbitral awards still is quite high and that the annulment of awards is only appropriate in cases where exceptional material or procedural faults have occurred.