Arbitration in the Czech Republic

"The delays in the Czech Court system and the lack of experienced judges constitute a major challenge for the country's integration in to the European Union". That was the controversial verdict of the Brussels Commission's Report, Agenda 2000 on the Czech Republic's application to join the European Union.

While the Commission's views were dismissed by some commentators as ill-informed and exaggerated, few lawyers with experience of the Czech legal system would disagree that there are serious problems to be addressed.

How then can a western company doing business in the Czech Republic avoid having any dispute he may become involved in being dealt with by the Czech courts?

Agreeing to litigate in the courts of a different state is one option, but even if this can be agreed, serious difficulties are likely to be encountered in trying to enforce a foreign court judgment in the Czech Republic.

A better solution is to agree to arbitration. The Czech Republic is a signatory to the New York Convention on the Recognition and Enforcement of Arbitral Awards and it will enforce awards made in other member countries.

The purpose of this article, however, is to consider what options there are for arbitration in the Czech Republic and reviews some of the key provisions of the Czech Arbitration Act 1994.

Arbitration

Arbitration in the Czech Republic may take a number of forms. Traditionally, international commercial disputes were referred to the Arbitration Court attached to the Czechoslovak Chamber of Commerce. Since partition, this permanent court of arbitration now operates under the rather cumbersome name of the Arbitration Court attached to the Economic Chamber of the Czech Republic and the Czech Agricultural Chamber of the Czech Republic. The role of this institution is considered later in this article.

Arbitrations under the rules of international arbitral institutions such as the London Court of International Arbitration and the ICC are also permitted in the Czech Republic as are ad hoc arbitrations including arbitrations under the UNCITRAL Rules.

The Arbitration Act 1994

Whatever form the arbitration takes, the Czech Arbitration Act 1994 governs all arbitral proceedings taking place under arbitration agreements made after 1st January 1995.

A key change effected by the Arbitration Act 1994 is that it enables domestic as well as international disputes to be referred to arbitration. It has also widened the scope of disputes that are capable of being arbitrated. These are significant changes from the old law, which restricted the use of arbitration to disputes arising from international trade agreements.

Rationale for the 1994 Act

Following the Velvet Revolution of 1989, a legislative commission was formed with the task of producing a new arbitration law for the Republic.

It was hoped that modernisation of the law of arbitration would help to secure inward foreign investment by providing an internationally acceptable and politically neutral system of commercial dispute resolution. There was also a concern that, in the post communist era, an increasing number of foreign investment contracts were providing for arbitration abroad in Sweden and London rather than outside of the Czech Republic.

The Arbitration Act of 1994 is based on the old 1963 legislation. In contrast with the new arbitration laws elsewhere in Central and Eastern European, it is not based on the UNCITRAL Model Law.

Key Points in The Arbitration Act 1994

• All disputes relating to "property" (perhaps more accurately translated as "assets") are arbitrable. The precise ambit of this term is unclear, but it is generally accepted to include most claims of a financial or monetary nature.
• Arbitration clauses must be in writing.
• Both Czech and foreign citizens may act as arbitrators.
• Arbitrators have a statutory duty of confidentiality from which they can be released.
• There are specific provisions dealing with the appointment and disqualification of arbitrators.
• Proceedings are commenced only when the statement is lodged with either the relevant permanent court of arbitration or the president of the tribunal.
• Arbitral tribunals have the power to decide their own competence.
• The parties can agree their own rules of procedure.
• An arbitral tribunal may only hear evidence given voluntarily and cannot compel a witness to attend the hearing. A witness can be only compelled to give oral testimony by order of, and to, a Czech court.
• Parties can apply to the courts for preliminary measures in support of arbitral proceedings or the future execution of an award. In practice, however, the time it takes to secure a hearing before the court may be self-defeating.
• Arbitrators must invite parties to settle their dispute amicably.
• If the parties agree, the tribunal may take into account moral and equitable consideration instead of strict legal principles (ex aequo et bono).
• Reasons for any award must be given.
• A second appellate tribunal may review the award if this has been expressly agreed by the parties in the arbitration agreement. This review then forms part of the proceedings of the arbitration as a whole.
• Arbitration awards may be enforced through the courts.
• There are provisions dealing with the role of official bodies in maintaining the custody of arbitral documents and awards.
• Arbitrators must apply the provisions of the Code of Civil Procedure.
• The act specifies the grounds on which a Czech court may set aside an award made in the Czech Republic. One reason for setting aside such an award is that the court is satisfied that there would be grounds to apply for a new trial in civil proceedings. It is not clear how widely this particular power will be used.
• The act defines the jurisdiction of the courts in relation to arbitration.

Permanent arbitration bodies in the Czech Republic

Since 1992, three private permanent arbitration bodies (as opposed to ad hoc tribunals or state entities) have been recognised by Czech law: the Arbitration Court attached to the Economic Chamber of the Czech Republic and the Agricultural Chamber of the Czech Republic ("the Arbitration Court"); the Arbitration Court of the Stock Exchange Chamber; and the Arbitration Court of the Commodities Exchange.

The only Czech entities able to enact valid bylaws or rules for the procedural conduct of arbitrations held in the Czech Republic are the permanent courts of arbitration which can only be legitimately established by an act of parliament.

The Arbitration Court attached to the Economic Chamber of the Czech Republic and the Agricultural Chamber of the Czech Republic ("the Arbitration Court")

Given the number of important arbitrations that it handles, this is the most internationally prominent of the three permanent arbitration bodies.

Background history

The Arbitration Court dates back to 1949 when it was founded as the Arbitration Court of the Czechoslovak Chamber of Commerce. On 3 November 1994, the Czech parliament adopted a law on the merger of the Czechoslovak Chamber of Commerce and industry with the Czech Republic's Economic Chamber. The idea was to create a new central commercial interest body for the newly emerged state, to be known as the Economic Chamber of the Czech Republic.

The unified chamber, in partnership with its sister agricultural chamber, found itself the new guardian of the country's best known permanent arbitral institution. The functions of the old Arbitration Court were preserved and, under the 1994 legislation, arbitration agreements that refer to the old Czechoslovak Chamber are deemed to refer to the new Czech Arbitration Court.

Initially, the rules of the new Czech Arbitration Court remained those of the old Czechoslovak institution. But following on from the Arbitration Act 1994, new rules were issued on 15 March 1996 to govern the conduct of arbitrations in the new economic climate.

Organisation and services of the Arbitration Court

As well as its main centre in Prague, the Arbitration Court has now established a series of Czech regional offices which maintain their own specialised lists of regional arbitrators. This is in addition to the main list of both Czech and foreign arbitrators kept by the Arbitration Court's secretariat.

The key aim of this new venture has been to generate domestic arbitration business for the Arbitration Court following the loss of fee income from the drop in Moscow Convention references. To help attract business, the Arbitration Court has introduced a reduced fee structure for Czech parties. However, given the absence of a domestic dispute arbitration culture, generating new local work is proving difficult.

The Arbitration Court maintains an archive of the documents and awards connected with the arbitrations that it administers these are available for the parties but not the public.

A conciliation service is also offered by the Arbitration Court at half the cost of administering an arbitration of the same dispute.

The Arbitration Court of the Stock Exchange Chamber and the Arbitration Court of the Commodities Exchange.

Arbitrations conducted under the auspices of the stock and commodities exchanges deal exclusively with disputes arising from dealings on the two exchanges. Their tribunals only operate on the basis of their own rules.

Conclusion

While it remains to be seen whether the court system of the Czech Republic (which has also applied to join the Lugano Convention) is considered acceptable by the European Union, a western company doing business with a Czech entity would be well advised to include in his contracts a clause providing for arbitration, whether in the Czech Republic or in a neutral venue.

Neil Aitken and Charles Spragge

This article was first published in In-Brief and Arbitration