A new Supreme Court ruling concerning compensation for breach of a distributor agreement emphasises the binding character of awards.

Arbitration is characterised by the parties' agreement that disputes are to be settled by private arbitration instead of by the courts. However, this does not mean that the courts cannot become involved in the arbitration proceedings. For example, the courts may set aside an award as invalid even though this is a narrow exemption. This is illustrated by a new Supreme Court ruling. The ruling is interesting because it is quite seldom that the courts are given the opportunity to decide on questions concerning the setting aside of awards.

LIMITED POSSIBILITIES OF SETTING ASIDE

Section 37 of the Arbitration Act lays down the framework as to when the courts can set aside an award as invalid.
Under section 37, the courts may set aside an award in the following situations:

  • If one of the parties to the arbitration agreement was under some incapacity, or if the agreement is invalid;
  • If the party claiming invalidity was not given proper notice of the appointment of an arbitrator or of the arbitration proceedings or if the party was otherwise unable to present his case;
  • If the award deals with a dispute not covered by the arbitration agreement, or contains decisions on matters beyond the scope of the arbitration agreement;
  • If the composition of the arbitration tribunal or the arbitration procedure was not in accordance with the parties’ agreement or the Arbitration Act;

In addition, the courts may, on their own initiative, set aside an award in the following situations:

  • If the subject-matter of the dispute is not capable of settlement by arbitration;
  • If the award is manifestly contrary to the legal system (ordre public), which, according to the legislative history behind the Act, requires that the tribunal has made a very serious mistake.

SEVERAL REASONS FOR INVALIDITY IN PLAY BEFORE THE SUPREME COURT

In the specific award, the tribunal had decided that Taewoong Inc. was to pay DKK 20 million to AH Industries A/S as compensation for breach of a distributor agreement.
Taewoong Inc. then brought legal action before the courts claiming that the award was invalid and had to be set aside.

Taewoong Inc.'s argued the following:

  • That the award was contrary to fundamental principles as Taewoong Inc. had been prevented from presenting its views on important issues;
  • That the arbitration procedure was not in accordance with section 28 (3) of the Arbitration Act as the tribunal's measuring of compensation was based on an assessment of equity without the parties' consent;
  • That the tribunal's construction of the distributor agreement lied outside the framework of the claims and allegations made;
  • That the award was contrary to ordre public as it enforced the distributor agreement, which, according to Taewoong Inc., was contrary to EU competition law (article 101 of the TEUF on anti-competitive agreements).

THE SUPREME COURT DID NOT SET ASIDE THE AWARD

First of all, the Supreme Court noted that an award can only be set aside within the scope of section 37 of the Arbitration Act. This means that there is a prohibition against a substantive assessment, except in quite extraordinary situations where the award is manifestly contrary to ordre public.
Secondly, the Supreme Court made a specific assessment of each argument that Taewoong Inc. had made in support of the award being set aside.
The Supreme Court concluded that the tribunal had not set aside fundamental principles, the arbitration agreement or the Arbitration Acts' provisions on the procedure. This was justified by the fact that Taewoong Inc. had not substantiated that the tribunal's construction of the distributor agreement lied outside the framework of the claims and allegations made. The Supreme Court also concluded that the tribunal had not made an assessment based on equity.
Finally, the Supreme Court was to assess whether the tribunal, when assessing that the distributor agreement was contrary to article 101 of the TEUF on non-competitive agreements, had made a very serious mistake resulting in the award being manifestly contrary to the legal system in Denmark.
In this connection, Taewoong Inc. had requested that the question as to how intensely the Supreme Court was to determine whether article 101 of the TEUF had been violated, would be presented to the European Court of Justice, but the Supreme Court rejected this request as it believed, referring to a 1999 ruling, that there was no doubt as to the case law of the European Court of Justice's.

The Supreme Court found that even if article 101 of the TEUF must be enforced in the same way as a mandatory statutory rule according to the case law of the European Court of Justice, there were no grounds for establishing that the tribunal had made a very serious mistake, which made the award manifestly contrary to ordre public, and the Supreme Court did therefore not set aside the award.

COMMENTS

The ruling confirms that only in very seldom situations, an award can and should be set aside as invalid, and it also illustrates that it takes something extraordinary for the ruling in terms of substance to result in an award being set aside.
From an arbitral perspective, the ruling is welcomed as it emphasises the binding character of arbitration awards.

 

contacts

Jacob Møller Dirksen

Partner

Daniel Haue Jakobsson

Attorney