- On July 6, 2022
A court panel of the Bulgarian Supreme Court of Cassation (SCC) has recently asked the Constitutional Court whether the revocation of the public order as one of the legal grounds for setting aside arbitral awards contradicts the Constitution. The said revocation was made in 2017 via the major changes in the local International Commercial Arbitration Act (the Arbitration Act). The reason for trashing the public order remains shrouded in mystery, as some argue this was deliberate, and other – that it was legislative oversight.
What bothers the SCC?
The underlying dispute which led to the Constitutional Court referral is a long-lasting saga between the former Bulgarian Agency for Privatisation and Post-Privatisation Control (now the Public Enterprises and Control Agency (the Agency)) and a private company – KG Maritime Shipping JSCo (KG Maritime) – regarding the privatization of the Shipping Bulgarian Navy JSCo. The Agency claimed penalties under the privatization contract from KG Maritime for alleged contractual non-performance to maintain certain average annual total tonnage of the navy’s ships for the agreed 10-year period. The dispute was considered twice by arbitral tribunals with the Bulgarian Chamber of Commerce and Industry and with the latest award the tribunal found that KG Maritime did not owe a penalty in the amount of approx. EUR. 13,800,000 to the Agency. Now, the award is challenged by the Agency before the SCC. Among other grounds for setting aside, the Agency claims that the award contradicts the public order (which, however, was not among the existing legal grounds for setting aside as of the moment of filing of the claim for challenging the award due to the abovementioned 2017 amendments).
The SCC decided to suspend the proceedings and ask the Constitutional Court whether the changes in the Arbitration Act regarding public order contradicted the Bulgarian Constitution[i].
The SCC’s reasoning
The SCC based its request on several grounds[ii]:
- Insufficient protection of fundamental rights such as the right to seek court protection in case of violation or threatening one’s rights and legal interests (Arts. 56, 121 and 122 of the Constitution) and the right to a fair trial and to an effective remedy (Arts. 6 and 13 of the European Convention on Human Rights and Art. 47 of the Charter of EU of the Fundamental Rights). These rights as per the SCC required an effective court control (a mechanism for review) depending on the specifics of the case, and in the arbitration proceedings this control means setting aside proceedings. However, as contradiction with public order could not be invoked anymore, these rights were insufficiently guaranteed by the Arbitration Act, especially in cases of violations of fundamental legal principles.
- The historic interpretation of the Arbitration Act. The original motives for adoption of the Arbitration Act stipulated that the grounds for setting aside should mirror those for denying enforcement under the New York Convention (the latter explicitly envisages the contradiction with public order as a possible ground for denying enforcement). The SCC explicitly clarified that it did not claim contradiction of the Arbitration Act with the Convention, but merely made this reference to clarify the legislative intentions behind adopting the said rules (i.e. for the purposes of interpretation).
- Protection of EU imperative law. SCC pointed out that it was possible to have a contradiction with an imperative EU norm that is part of Bulgarian public order when resolving a dispute via arbitration. As the arbitral tribunal has no powers to refer the matter to the CJEU for preliminary ruling (because it is not a state court), the state courts were the last guardian that should consider the matter and potentially ask the CJEU for interpretation. However, as the contradiction with public order could not be invoked before the state courts in the set aside proceedings anymore, the court was ultimately deprived from this opportunity.
What our experts say on the matter?
Our Dispute Resolution Team has commented on this legislative change in the past expressing exactly the concerns of the SCC (see an article from 2018 in Bulgarian here). We expressed the view that the repealing of the contradiction with public order by the legislator is unconstitutional and have encouraged supreme judges to refer the matter to the Constitutional Court when there is a good occasion. On a separate note, we have urged the legislator to reinstate public order among the legal grounds for setting aside as this is how things stand in almost all arbitration friendly jurisdictions. The aim is to protect the parties from bribes, frauds, forgeries, flagrant violations of fundamental mandatory rules, and other similar major defects of a potential award/arbitration proceedings fundamentally affecting the basic legal concepts of fairness and justice. Of course, this ground should be applied narrowly and should not be used by the state courts as an attempt to reconsider a given dispute on the merits.
What is the opposite view?
There are also opposite views in the legal doctrine, arguing that the public order is a concept inherent to the private international law which has protective function – namely to deny the application of a foreign legal system or decision where the result is incompatible with the fundamental principles of the seized court’s legal system. Hence, if a foreign substantive law applies to an arbitration seated in Bulgaria, then a potential contradiction with the public order should be tackled in the arbitration proceedings themselves, provided that the preconditions therefor are present. Following this line of argumentation, a Bulgarian court or arbitral tribunal seated in Bulgaria cannot render a decision/award conflicting with the Bulgarian public policy (in substantive sense). A potential contradiction with the public order in procedural sense can be invoked by virtue of the other available grounds for setting the award aside (this view is explained in detail in Zhelyazkova, Ventsislava, Arbitration as a mechanism to resolve disputes concerning rights capable of valuation in monetary terms, Sofia, Nova Zvezda, 2019, pp. 326-328).
Now the ball is in the field of the Constitutional Court. A potential resurrection of the public order may have significant implications for any ongoing and potential set aside proceedings. So, we will monitor the matter closely and will duly update our readers.
Author: Metodi Baykushev
[i] The SCC’s Court Ruling for suspension of the case can be found here: http://www.vks.bg/pregled-akt?type=ot-delo&id=D08E924B5ADE3283C225886F00449959
[ii] The SCC’s Request to the Constitutional Court can be found here: https://www.constcourt.bg/bg/Acts/Download/f45c108c-8166-422e-a403-a2b02aa8cb99