The Supreme Court recently ruled on the liability of arbitrators to pay damages.(1)

Contract

The arbitrators’ contract stated that in order to file a suit for damages against the arbitrators, the following requirements had to be met:

• The arbitration award had to be annulled pursuant to Section 611 of the Code on Civil Procedure.
• The arbitrators had to have acted with ‘gross negligence’, as defined by the Supreme Court.

The parties to the arbitral proceeding and the first, second and fourth defendant signed the contract.

Case overview

The Supreme Court upheld the terms of the contract, finding that civil claims for damages can be pursued against arbitrators only after the arbitration award has been annulled pursuant to Section 611 and that the arbitrators must be found guilty of gross negligence.

The plaintiff argued that restricting a liability claim for intentional injury was illegal, as per the Supreme Court’s jurisprudence, which prohibits excluding liability for intentional injury. According to the agreement, the arbitrators would be considered liable where gross culpability (malice or gross negligence under Section 1304 of the Civil Code) had occurred, but not in the case of slight negligence. However, this liability could be pursued in court only after successfully challenging the arbitration award.

According to the prevailing legal opinion in Austria – which has been laid out by the Court of Appeal – an arbitrator can be sued for damages in connection with his or her actions as an arbitrator only after the arbitration award has been successfully challenged, unless liability is based on a refusal to issue an award or a delay therein.

Tying a liability suit to the annulment of an arbitration award in the arbitrators’ contract is in line with the Supreme Court’s jurisprudence on the protection afforded to arbitrators, which has largely been welcomed by legal scholars. For this reason, in the case at hand, the court found that the contract was valid within the meaning of Section 879 of the Civil Code.

The plaintiff sought to have this contractually agreed liability protection disregarded, basing its claims regarding the arbitrators’ liability for damages on the allegations that it had raised in its suit to challenge the arbitration award (ie, that the arbitral proceedings were conducted in an intentionally biased way and were contrary to public order within the meaning of Section 611(2)(5) of the Code on Civil Procedure).

The court found that the liability clause not only encompassed a loss manifested in the arbitration award itself (ie, in one party not fully prevailing in the arbitral proceedings), but also extended to all of the arbitrators’ actions – including the fourth defendant, who was declared prejudiced – which affected the arbitration award according to the plaintiff’s arguments. The plaintiff had filed claims against the removed arbitrator only for those losses which occurred as a consequence of his actions. The plaintiff had filed a separate unsuccessful suit for the losses allegedly resulting from his actions or omissions until he was removed.

The third defendant, who had been appointed chair of the arbitral panel after the fourth defendant was found to be prejudiced, had not signed the arbitrators’ contract. For that reason, the plaintiff contended that the contractual limitation of liability did not apply to the new chair. However, under Austrian law, only arbitration agreements must be made in writing and signed by the parties to the arbitration proceedings. This formal requirement does not apply to contracts for arbitrators, which can be entered into without formal requirements and can even be entered into implicitly.

The court highlighted that a contract with an arbitrator will be considered concluded once he or she is appointed by the competent person and assumes his or her role as an arbitrator. Thus, the court found that privileging the new chair – who was appointed only because his predecessor was prejudiced – over his predecessor and the remaining arbitrators was unreasonable. The contract thus had to be interpreted in a way which extended the contractual rules regarding liability to the third defendant.

Comment

This case demonstrates that arbitrators’ contracts should be interpreted in a way that ties the arbitrators’ liability for damages to the annulment of the arbitration award, particularly in cases in which the alleged intentional breach of duty falls under one of the possible challenges laid out in Section 611(2) of the Code on Civil Procedure. This avoids different outcomes in two proceedings – one for damages and one challenging the arbitration award, both of which are essentially based on the same grounds.

Endnotes