Annulment of arbitration award
Rationale behind high threshold for personal liability of arbitrators
Greenworld applies when award is annulled on basis of procedural issues
Failure to have co-arbitrators sign award amounts to gross negligence
On September 30 2016 the Dutch Supreme Court issued a decision on the personal liability of the president of an arbitral tribunal. In 2009 the Supreme Court's Greenworld decision made clear that, in the Netherlands, it is possible under exceptional circumstances to hold arbitrators personally liable on the basis of the Civil Code. In its recent decision, the Supreme Court clarified the scope of application of the Greenworld standard.
Qnow BV (the claimant) entered into an agreement with another party with the purpose of transferring a package of shares. In September 2017 the shares were transferred. However, the other party later annulled the agreement extra-judicially. The parties initiated arbitration and the tribunal decided in favour of Qnow. However, the president of the tribunal (the defendant) neglected to have the award signed by his fellow arbitrators. Article 1057 Paragraph 2 of the Code of Civil Procedure prescribes that an arbitral award should be signed by the arbitrator or by the arbitrators. Article 1065 Paragraph 1(d) subsequently determines that otherwise, the award is susceptible to annulment.
The other party took the award to the Amsterdam District Court and its request for annulment was granted. Qnow continued the dispute at the Maastricht District Court. Qnow also initiated proceedings against the president of the tribunal. Qnow alleged that the annulment of the award was caused by a professional error of the arbitrator, and that the latter was therefore responsible for the damages suffered as a consequence.
Under Dutch law, there is no special liability regime for arbitrators. Unlike in most common law jurisdictions,(1) arbitrators in the Netherlands do not enjoy immunity. An arbitrator can be personally liable on the basis of a wrongful act, in the sense of Article 6:162 of the Civil Code, but only in exceptional circumstances.
Until 2009, the standards for arbitrator liability were unclear in the Netherlands ? for some time, it was even assumed that arbitrators could not be held personally liable at all.(2) However, this changed with the Supreme Court's decision in Greenworld.
The dispute brought to arbitration in Greenworld concerned an agreement between Sagro BV and ASB Grünland. ASB Greenworld BV, although not contractually engaged, was responsible for processing the invoices. When Sagro initiated arbitration, it involved both Grünland and Greenworld in the proceedings. Greenworld objected and argued that it was in no way bound to the arbitration clause in the contract – to which it was, after all, not a party. However, the tribunal rejected Greenworld's objection and declared that it was competent to decide on the dispute. The award was finally annulled at the court of appeal, at which point Greenworld claimed that the arbitrators who had sat on the tribunal were liable for damages.
The liability proceedings went all the way up the Dutch Supreme Court where, for the first time in Dutch legal history, it was confirmed that arbitrators can indeed incur personal liability, but only if they "in relation to the annulled award, intentionally or knowingly acted recklessly or with a gross misjudgement of what a proper fulfilment of their duties entails".(3)
This standard of gross negligence finds its counterpart in the liability of the Dutch state for the conduct of the judiciary when the wrongfulness of such conduct is due either to intent or to gross negligence on the side of the judge or court.(4) Article 42(1) of the Judicial Officers Legal Status Act determines that only the Dutch state can be liable towards third parties. However, as Article 42(1)(4) adds, the state can in turn have recourse against the responsible judge.
In contrast with the Supreme Court's decision in Greenworld, Article 42(3) determines that a judge can never be liable for a judicial decision. In other words, a judge can be liable only for what are generally referred to as 'workplace mistakes'. A 'workplace mistake' entails conduct that has nothing to do with the exercise of the judicial function ? for example, losing case files or causing a traffic accident on the way to a local inspection. Personal liability of arbitrators is therefore broader in scope than personal liability of Dutch state judges.
There is a rationale behind the high threshold for arbitrator liability in the Netherlands. As is the case with both the government judicial system and arbitration, most disputes allow for different outcomes, while none of those outcomes is necessarily wrong or incorrect – in other words, the judge or arbitrator can (and should be able to) go different ways. There can be several reasons for annulling an award or decision; annulment does not necessarily imply that the initial decision was substantively incorrect or that the decision maker has forsaken his or her duty.
Furthermore, taking the principle of contractual freedom as a starting point, domestic courts generally show great respect to the parties' wishes; and if they wish to have their disputes settled by arbitration, that choice and the ensuing arbitral decision should be respected. Even though awards can, for a limited number of reasons, be annulled by general domestic courts, such annulment will not usually also entail the arbitrators' personal liability. Not only would this severely limit the scope of the arbitrators' decision-making powers, but arbitrators could grow overly cautious or become reluctant to engage in arbitration altogether. Assuming liability too easily would deter those practising arbitration and would render it a less flexible and less effective means of dispute settlement.
Although the Greenworld standard has been confirmed by subsequent case law,(5) its scope of application remains unclear regarding certain aspects. The 'gross negligence' standard as formulated in Greenworld poses a high threshold for finding liability of an arbitrator. For the reasons mentioned above, this is beneficial to the effectiveness and flexibility of the arbitral decision-making process and the willingness of practitioners to act as arbitrators.
The recent Supreme Court case sheds light on the scope of the Greenworld standard as it clarifies the type of conduct for which arbitrators may be held personally liable. In Greenworld, the award was challenged on certain substantive matters (competence-competence – the arbitrators had found that they were competent to adjudicate on the dispute, when in fact they were not). Qnow argued that the Greenworld standard applies only to awards annulled on the basis of substantive issues and does not apply when the award is annulled because of the violation of procedural or formal requirements. Both the district court and the court of appeal agreed.
However, the Supreme Court decided differently, finding that all arbitral conduct should be assessed in light of the Greenworld standard. Only one exception applies for so-called 'workplace mistakes', referred to earlier. For such conduct, the usual standard of liability for wrongful conduct under Dutch law applies.
After establishing that the Greenworld standard applies in case of a failure to fulfil purely procedural requirements, the Supreme Court went on to assess whether this particular error was sufficiently serious to qualify as gross negligence. The signing of the award of the participating arbitrators is, in the words of the Supreme Court, a "substantial part of his [the president's] task";(6) failure to complete this task correctly could therefore amount to gross negligence, especially considering its very serious consequences (annulment of the award). Furthermore, such negligence is 'objectified' (ie, it should be assessed according to the circumstances of the case and independent from the arbitrator's intentions or good faith).
Arbitrators must be aware of the importance of procedural instructions and the potential risks of not following them. This decision was issued under the previous Arbitration Law. Since 2015, Article 1065(a) of the Code of Civil Procedure has opened up the possibility of rémission (ie, the referral of a case back to the arbitral tribunal that issued the award to remedy the error).
For further information on this topic please contact Alfred Hoogveld at Hogan Lovells International by telephone (+31 20 55 33 600) or email (firstname.lastname@example.org). The Hogan Lovells International website can be accessed at www.hoganlovells.com.
(5) In a decision of the Oost-Brabant District Court dated October 15 2014, the arbitrators neglected to respect the statutory waiting period of four weeks (Article 1035 of the Code of Civil Procedure) which should be considered if one of the parties challenges the arbitrators or the entire tribunal. The arbitral award was annulled and the arbitrators were held liable, because the district court considered that Article 1035 of the Code of Civil Procedure is a mandatory statutory provision; ECLI:NL:RBORB:2014:6276.
Marit van Zandvoort, student legal assistant, also assisted in the preparation of this update.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.